While it is fresh in the mind, did anyone else feel like Easter eggs aren’t what they used to be? There is always plenty of choice when it comes to sizes and prices. The bad news is that, compared to any previous year, they almost always contain less chocolate and cost more[1].
I did my best not to forget the common wisdom of “you get what you pay for”, “ buy cheap, buy twice” and “penny wise, pound foolish”. These have long been passed down, or in many cases learned the hard way. Like many rules of thumb, they become accepted and then part of the subconscious. They make our lives easier, with less decisions, and we can spend valuable thinking time on other matters. That’s the theory at least.
If only life were that simple. For some goods, we would happily buy more if available at a lower price. Some we need only sparingly or infrequently. Some immediately, no matter the price. Then there are those strange cases where higher prices increase desirability, even if the product itself remains unchanged. The world loves being complex, and unfortunately for us consumers, we have to face off against sophisticated marketplaces setup to take advantage of all our weaknesses.
Companies have for years dedicated people, money and computers to refining tricks to maximise the extraction of our spending power. Research suggests that, even some of the oldest, such as ending a price with a 9 or 5, still work[2]. Since the advent of the internet and e-commerce prices and discounts change far more frequently than in the past[3]. As a consumer, it is a struggle to understand what a reliable price is any more. Even customer loyalty, which used to be rewarded, is now used against us. Supermarkets are effectively forcing the handover of data through exclusive member pricing, and woe betide anyone who doesn’t switch their utility, phone or insurance providers each year! They aren’t to blame; to the contrary, it is their job to maximise profits by any legal means available.
Luckily, there has always been a strong counterweight; the competitive and globalising economy of the past twenty years, with outsourcing, plentiful labour and falling interest rates. Corporations were kept on their toes, if not by existing competition, then at least by new startups or entrants from overseas. Many regulations fell away, and overall inflation was negligible.
But several things changed. First, the re-emergence of trade tariffs. Then of course the pandemic. An unprecedented form of stimulus where any company that could get hold of supplies was able to charge a premium. Finally, the war in Ukraine and another round of spikes in commodity prices. If there was ever a time for companies to raise prices, this was it. And they did.
There is little doubt that this has been part of a bonanza for corporate profit margins. Measured by operating profit, net profit or even free cash flow, U.S. margins are at their highest levels in modern history. None of this is ideal for consumers, but with many stock markets at all-time highs, is this not nirvana for investors? Ever since Warren Buffett spelled it out after buying into Coca-Cola and See’s Candy, the concept of pricing power has continued to gain in popularity. There are even “pricing power” exchange traded funds. After all, how hard can this investing thing be? Find a few great brands that have spent years advertising, with stable, high and/or rising gross margins and let capitalism work its magic. If only life were that simple…