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Kersten L. Kelly: A Penny Saved Is Much More Than a Penny Earned

Today BookZone welcomes Kersten L. Kelly who is touring with Orangeberry Book Tours promoting her non-fiction title, Ec-o-nom-ics. Kersten has graciously supplied us with an excerpt which covers the topic of saving. So please sit back and relax whilst we introduce you to author, Kersten L. Kelly!

A Penny Saved Is Much More Than A Penny Earned
by Kersten L. Kelly

Kersten L. Kelly

The current national average price of regular unleaded gasoline in 2011 was $3.61 per gallon, as compared to the 2010 average of $2.67. This is an increase of 35.2 percent for a single commodity, something that did not improve to warrant an increase. As exemplified from these simple statistics, gas prices are one of the most extremely volatile variables in a given time period. Other commodities are lucky to increase at the rate of inflation (which tends to hover around 3 percent per year), without the general public griping about the escalated price.

Just to show how drastic of an increase this is, I would like to use milk (a standard commodity) as a comparative example. An average gallon of milk retailed between $3.50 and $3.99 in 2011. If milk prices inflated at the same rate as gas, prices in 2012 would run between $4.73 and $5.39 per gallon, surely resulting in a lot of outraged consumers and some cocky cows! Although a few outliers would purchase milk despite the cost, the majority of consumers would try to find another source of calcium.

Price sensitivity of gas is so extreme that advertisements go to the extent of listing $3.619 instead of $3.62. With a multitude of gas stations readily available within a one-mile radius of most urban markets, consumers have a choice of where to purchase their gasoline. Many four- corner intersections have a different gas station on each corner. The managers of these facilities are obsessive about checking competitive prices and maintaining equality down to the penny (and sometimes one-tenth of a penny!). Why is this strategy so extreme? Gas stations within a relatively close geography experience the Prisoner’s Dilemma.

Regular unleaded gasoline standards require specific chemicals to fuel an engine in a car. The United States government sets regulations for the quality standards of this commodity. Because of this, the brand of the same grade of gasoline is something many consumers do not consider when purchasing. Branding is irrelevant when there is little to no quality differentiation between two distinct venues.

Keeping this in mind, consider the consequences if one gas station, Station A, in a competitive intersection dropped their price by two cents per gallon. In other words, they chose to “confess” in this case. Because the stations in the intersection are within 200 feet of one another, location is negligible; a consumer can easily choose to drive to either station without a major inconvenience. Why would any consumer choose to go to the higher-priced gas station for the exact same commodity? They won’t!

Station B, in the same intersection, has the option to “confess” and lower their price by the same amount or to “deny” and compete with a higher price. By “denying,” they will ultimately sabotage their revenue because the same commodity can be purchased for less money right next door. Any rational consumer will gravitate toward the two-cent savings. As a result, Station B has a larger incentive to follow the Prisoner’s Dilemma and “confess” (or lower the price).

There are two distinct impetuses for retail to lower prices. First, there is a larger perceived savings than just two cents per gallon. One might argue that Station B risks losing that additional two cents per gallon in revenue by lowering the price. This is true, but the loss is taken with a potential larger marginal gain. Although that two cents might appear to be a menial discount, price-conscious consumers are accustomed to equivalent pricing amongst gas-selling competitors. Even the slightest discount per gallon is perceived to be a great savings for the overall purchase.

With the latest technology implemented through the Internet and Smartphone applications, consumers now have direct access to a plethora of gas prices in a given area. The website GasBuddy.com provides users with an opportunity to look up the price of gas at different stations in an area. This makes competition even more difficult.

Not only does the website provide consumers with prices down to the penny, but it also gives a direct option to map the location from where the consumer is located. For someone who is unfamiliar with the area, the website provides a simplistic method to find the cheapest possible commodity. This creates a price sensitive market at the fingertips of consumers. Because of tools like this one, retail owners need to be especially accommodating if they want to snag the business of their price- conscious consumers.

There is a second function of penny savings on gas: Consumers tend to associate discounted prices with the establishment as a whole. In other words, if an establishment advertises that they have “discounted gas,” the reputation of the store will allude to a discount atmosphere. It isn’t coincidental that outdoor price signs show a tenth of a cent. This is strategic, an attempt to portray some sort of savings (even if it is a mere penny or less) to the consumer. Gasoline is a commodity that yields a few pennies, if any, per sale. The real dollar margins are made on commodities for sale inside the walls of the store.

If a customer is hungry, thirsty, or needing lotto tickets or cigarettes while they are pumping gas, they are likely to purchase convenience items, and these yield margins of 25 to 60 percent from the same store. The key to success is to lure customers into the gas station. While they are there, and especially if they have to go inside to pay for their gas, many will make impulsive purchases of items with huge profit margins. With statistics like that, Station B has a significant incentive to lower their price (or confess). If they don’t, they risk a much larger loss than two cents. They risk losing the loyalty of a customer. This directly embodies the Prisoner’s Dilemma theory.

Economics

Buy Now @ Amazon or Book Depository
Genre – Narrative Non-Fiction
Rating – PG
More details about the book

Connect with Kersten L. Kelly on Twitter & Facebook
Website: http://theeconomicsbook.com/
Check out where this author will be talking about her latest release!
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