Price discrimination and pricing strategies between 7/11 and fair price shops

1. Pricing strategy of Mashed Potato eatable @ 7/11
7/11 stores are 24*7 and this is the key factor of having eatable vending machines which
attract customers even during the odd hours of the day. When observed, Fair Price does not have
any such facility of any eatable vending machine. As per my understanding, fair price cannot block its
space on the floor with such vending machines as there is no demand for it in their shops. The
reason being only that fair price works as a departmental store for a specific time limit.
Any individual, who would be hungry will pay any price for it at the odd hours of the day,
when food is not available anywhere. He/she would end up at 7/11 shops to have a cup of mashed
potatoes with sauce. This proves that the elasticity of demand for the mashed potatoes would be
inelastic. A rise in price would not reduce demand to a higher degree. This is a necessity for the
people who are awake till late hours.
7/11 also has come out with a smart strategy of packaging these mashed potatoes with a
small glass of soft drink. A combination of these two would cost only $SGD 2 and if bought
individually would cost $SGD 1 for mashed potatoes and $SGD1.6. This pricing strategy also forces
the customer/consumer to buy both as a package as a drink would be necessary with the eatable. As
a result, the consumer would feel thirstier as mashed potatoes would be dry and heavy after a
point. This would result in the consumer buying another soft drink or a bottle of water costing
approximately a $ SGD.
We can term this as indirect rice discrimination where in the shop indirectly is digging a hole
in the pockets of the consumer buying this package of mashed potato and the soft drink. These
mashed potatoes would not be costing anything more than SGD 50c and the small glass of soft drink
does not cross the SGD 75c mark.
Irrespectively of it being consumed individually or as a package there is a high margin and
the consumers are being forced to pay the price for it. Buying a mashed potato individually / combo
offer with soft drink can be termed as an entry fee which would result in another payment of an
extra dollar for some more liquids to quench the thirst.
When this entire scenario is compared to fair price, it is evident that the demand in 7/11 is
inelastic and even in case fair price introduces the same, it would not succeed as the demand
would be elastic.
Customers would switch their preferences to 7/11 very soon and might result in some more loss of
consumers.
Therefore, 7/11 has adopted this tactic to counter the lower prices of fair price in all articles and
ensure customers are loyal to 7/11 with this 24*7 advantage. This is not only with respect to this one
product but can be observed in various combo offers and other pricing strategies that 7/11 follows
to improve market share against fair price.
Differentiation in price of products between 7/11 and Fair price
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2. On observation for a range of products, it was found that fair price has a relatively cheaper
rate than 7/11. Prices at Fair price are lesser by a range of 1%-10% when compared to 7/11.
Both being in a perfect competition it is interesting to understand the logic behind this price
differentiation. When there is a product available in a perfectly competitive market, it is more often
at similar rates. This is because perfectly competitive markets are price takers and not price
makers.
But in the case of the arch rivals – 7/11 and fair price, fair price still manages to capture
more markets than 7/11.
The differentiation factor is because 7/11 is a 24*7 shop with limited products available for
daily use (specific necessities) and Fair price is open for limited hours with huge varieties of
products. If in case fair price and 7/11 had kept similar prices or fair price had even a single cent
more than 7/11 on similar products, then customers would find it economical to purchase the same
at 7/11 due to lower price and 24*7 accessibility.
The reason Fair price is able to gain a market share is that cost advantage a consumer gets
whenever he steps into Fair price. The extra effort take is only of purchasing during limited business
hours which has a high return in terms of cost when various products are purchased in one visit. On
an average a Fair price customer could save anything between SGD$ 5-SGD10 on a SGD$100
purchase. Fair price covers this up by increasing the variety of goods available on the shelves which
attracts customers and gives them a choice to select from. Fair price ensures variety and bulk
purchases which saves them on cost and allows them to attract more customers by the cost
advantage which in turn results in a higher turnover and profit in spite of lower prices.
This also gives fair price the advantage of increasing the prices marginally when the market
rates go higher. It will not impact much to fair price as they are already under quoting the prices
when compared to market and there is a room for increase. Whereas a market price rise would
result in a bigger problem at 7/11. 7/11 already is charging more than fair price on similar goods and
might have more costs due to its 24*7 concept. This would result in reduction of profits or it will
have to develop a new strategy of pricing to counter the fair price initiatives.
For convenience stores like fair price and 7/11 it is banking on higher sales and lower prices.
Normally they would have elastic curves but when only the two stores are compared, fair price
would have a relatively lesser elastic curve resulting in an advantageous position in the market in
spite of a 24*7 convenience store available.
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