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The donut case - a few thoughts on price elasticity

· 3 min read
Wojciech Gruszczyk

Last Thursday before Lent is a special day in Poland. It is a bit like Shrove Tuesday, yet instead of pancakes, we eat donuts. This year it was very uncommon for me, and it wasn't because of the donuts but of an unexpected phone call I received...

Unicorn on a donut, image by Pixabay.

The story

Believe me or not, a few days before the day I received a call from the owner of a construction company that built my house 10 years ago. I was shocked as we haven't met or spoken ever since. The conversation was quite unusual - he asked me if I still live in the house and later if I remember a tiny, green shop in the neighborhood. So far so good. When I confirmed, he asked if they still offer the delicious donuts he bought there 10 ago. When I confirmed again, he asked me if I can make an order for him for 30 donuts.

That story brought me to think about... products.

Price elasticity

When you think about the story from a distant perspective it all feels completely insane:

  • he traveled almost 50 kilometers (~31 miles) to pick up the donuts,
  • he didn't even ask for the price,
  • the donuts he wanted didn't even look good,
  • they are offered only with one kind of stuffing.

From the same, distant, perspective:

  • you can buy donuts almost everywhere,
  • you can find bargain prices easily,
  • you can have different types and tastes of donuts.

In theory, donuts should behave according to the rules of Price elasticity of demand1 - as a common good any factor like the high price should lead to a drop in demand. Why it wasn't the case? I think that it was related to some unique features those donuts have:

  • they are only available on demand (you need to order),
  • even during the year, they are available on Saturdays only (I have no clue why!),
  • they are baked to smell and taste like in the past (my grandmother baked such donuts when I was a child!).

All that makes them unique and - in general - unavailable. It makes them so-called Veblen goods2. This kind of luxury good has a very demanded feature - customers often decide to pay a higher (sometimes very high!) price and do not want to go with cheaper substitutes.

Conclusions​

Knowing the theory of price elasticity of demand and the extra features of Veblen goods may be very handy when designing products and pricing models. If only you can make your product exceptional (luxury), price elasticity may change and lead to higher margins and smaller customer churn. The differentiator may be functional (hard-to-copy features) or non-functional (brand- or community-related).

Have you experienced the laws in action? Maybe you have applied them in your strategy? Leave your thoughts in the comments!

Footnotes

  1. Wikipedia - Price elasticity of demand

  2. Wikipedia - Veblen good