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Last Updated: Thursday, 24 August 2006, 23:28 GMT 00:28 UK
'Product sabotage' helps consumers
By Tim Harford
Presenter, Trust me I'm an economist, BBC Two

Cup of Starbucks coffee
It looks good, but are consumers getting the best deal possible?
Why would a company deliberately hide its best product?

Starbucks does.

Why would a company deliberately damage its best product?

Many hi-tech companies do that, and even my favourite local restaurant does.

It doesn't sound like a winning formula, but it's at the heart of the way many companies do business.

Take the secret cappuccino, which you can buy in two of the leading coffee chains, Starbucks and Coffee Republic.

The sales assistants know what the drink is and they have a little button on their cash tills to ring it up. It's cheaper than the other drinks on offer, but it doesn't appear on the menu.

Starbucks claims that's because they don't have room on the menu board. Coffee Republic doesn't even have that excuse: there's a blank space with no price where this drink should be listed.

It's called the "short cappuccino", and it's smaller, cheaper and better than the smallest size on the menu, the "tall".

Pricing battling

So what is going on?

It's all part of an attempt to aim different prices at different types of customer.

Any shop would love to be able to charge high prices whenever they could, while still offering low prices to customers who would otherwise shop somewhere else.

Woman looking at shirts in a shop
Consumers may have more goods to choose from than they think

Of course, if shops just asked their customers whether they would like a discount, every customer would say "yes", so shops need to get a bit smarter about working out which customers will pay which price.

Some of the attempts are obvious, such as discounts for students or pensioners.

You didn't think it was out of a sense of social justice, did you? Companies simply charge more to people who have jobs, because those people are willing to pay more.

Similarly, when a restaurant or a travel agent offers free meals or accommodation for kids, that's just a way of charging more to childless people who usually have more disposable income.

But the really clever tricks are where companies tweak their product line in an attempt to persuade customers to identify whether they are lavish or stingy - the lavish customers are simply turkeys voting for Christmas.

The confusing menu boards at coffee chains are designed to collect a few votes from the turkeys.

Choose the secret cappuccino and you are effectively beating the coffee shop down to a bargain-basement price at which they make little money.

Choose something off the menu and you're a more profitable customer: the biggest, most lavish drinks generate the highest profits.

Coffee companies hide or downplay the cheaper drinks in the hope that customers will buy something pricier.

The same but different

They are not alone.

Supermarkets package their cheapest products to look more like famine relief than something you'd want to pay for.

It's not because they can't afford sexy packaging even for their cheapest foods - it's because they want to persuade richer customers to buy something more expensive instead.

Economists call this "product sabotage" and it can reach extreme levels.

In the hi-tech world it is common to produce a high-specification product, sold at a premium price, and then sell the same product more cheaply with some of the functions disabled.

Worker at an Intel chip plant
High-tech firms have long offered a number of product choices

Intel did this with its 486 computer chip in the early 1990s, and IBM did it with a printer: the economy version for home users was simply the top-of-the-range model with a chip in it to slow it down.

These tactics might seem sneaky or unethical, and they certainly don't go down well with customers.

Yet frustrating as it is, product sabotage is often the cheapest way to produce two different versions of a product. For the hi-tech industry the alternative is to design the whole product twice.

And two different versions are what you need if you want to reach price-sensitive customers.

Pick and choose

If companies were forced to abandon their attempts at price targeting, it would usually be the cheaper deals that disappeared.

These tactics can certainly work to the advantage of price-savvy customers if they're willing to put up with a little bit of hassle.

My favourite restaurant offers the usual great food much more cheaply if you eat at the bar, and put up with systematic abuse from the barman.

It wouldn't work for a business lunch or a romantic meal, but it's just fine if I want to take my wife somewhere affordable.

Tim Harford is a Financial Times columnist and author of "The Undercover Economist". He presents a new BBC TV series, "Trust Me, I'm an Economist". The next episode is on BBC2 at 7pm on Friday August 25th.

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