Books: Everyday ways to squeeze more profit

The author aims to make consumers more savvy by helping them think like an economist. He succeeds, says Steve Lodge.

by Steve Lodge, a freelance financial and business journalist
Last Updated: 31 Aug 2010

My local Tesco no longer stocks 'Value' toilet paper and I've been forced to upgrade to 'Luxury Soft' at more than double the price. I've lost a toilet paper I felt comfortable with on all counts, though my housemates are mightily relieved.

But according to Harford, this is not simply a case of a business responding to customer demand (or the lack of). Lurking in the background is a sophisticated game of profit optimisation by Tesco.

The Value paper's cheap 'n' nasty packaging was a deliberate ploy by the supermarket, says Harford. The presentation is about trying to put off as many shoppers as possible so that they'll pay more for Luxury Soft, while not losing the stubborn miser sales. That way, successful supermarkets such as Tesco can sell to everyone and maximise their overall profits.

Since supermarkets are masters at the price-targeting games, outlets that don't stock value brands must have worked out that their shoppers aren't so price-sensitive and so they can make more money out of them.

My local Tesco is betting that even cheapskates like me won't switch supermarkets over the price of toilet paper.

This sort of analysis of everyday situations is the central theme of The Undercover Economist, the 'economics of everyday life in everyday terms', as the publisher puts it.

Why does Starbucks have such a wide range of coffees? By charging wildly different prices for various brews costing essentially the same, argues Harford, it squeezes extra profits out of free-spending customers while retaining the business of price-sensitive drinkers.

Or consider coffee bars that sell fair-trade coffee at a premium: is this really about supporting Third World farmers? Or does most of the premium go to the retailer, which has simply identified another trick to extract more profit from its less price-sensitive customers? You can probably guess Harford's position: similarly, he suggests that most of the premium on organic food goes to the supermarket's bottom line rather than covering increased farming costs.

Harford writes the Weekend FT's often witty and insightful Dear Economist column, which answers readers' personal problems using economic reasoning.

If you like the column, you'll like the book. This combination of economics and everyday makes for fresh perspectives and thought-provoking analysis of situations. Harford says in his book that he hopes to make consumers more savvy by helping them to view the world like an economist. I reckon he succeeds - and he makes the economics fun.

The Undercover Economist has been compared with the recent bestseller Freakonomics. Both are pacy, wide-ranging and readable. But Freakonomics covers other social questions, not least the controversial argument that legalised abortion has helped cut rates of violent crime in the US by reducing the number of unwanted children born to lower income mothers.

The Undercover Economist sticks closer to business issues, such as those retailer pricing games, the auctioning off of telecom licences and healthcare funding.

On healthcare, Harford offers a persuasive prescription for a Singapore-style system, with spiralling costs and demand controlled by making individuals spend their own money (with an associated cut in their tax bill), while the government provides cover only for catastrophic medical expenses and the poor.

This could provide real patient choice, as individuals would pay many of their own healthcare bills (having first been compelled to save into a personal medical expenses fund). And, argues Harford, patients would have an incentive to make choices that are reasonably cost-effective, as well as in their own interests.

It's a recurring challenge for economists to bring their subject to life for the rest of us, and trade flows, monetarism and obscure equations are unlikely to do it. Pitched at the general reader with an interest in economics, this book offers business people plenty of food for thought for their own trades. It may even spark some new tricks to pull on customers.

It's certainly a long way from being a boring textbook on the so-called dismal science.

Meanwhile, I am happy to report that Tesco is considering restocking my Value toilet paper. Who said the juggernaut was unstoppable?

THE UNDERCOVER ECONOMIST Tim Harford Little, Brown £17.99 To order, visit www.mtmagazine.co.uk.

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