I’ve made no secret that I’m only average or mediocre in the personal-finance skill of frugality. But I like to think I at least pay attention to price and to getting value for what I pay. When I buy things—especially big-ticket purchases—I often do research, shop around, and negotiate. Heck, when I’m at an all-you-can-eat buffet, I tend to go in with a hearty appetite and even target those food items I believe to be more expensive.
But I’m paying less attention than I thought.
I’m not someone who buys a latte every morning, but sometimes the urge will strike me. At that point, sometimes the spirit of frugality takes hold, and I think to myself that I don’t really need an expensive coffee drink, and I keep walking. And other times, I think, it’s not so bad, and not so expensive, and I don’t get them that often. And into Starbuck’s (or wherever) I go.
Then I pretty much get whatever I want. The prices of the drinks aren’t that different. There’s no second round of frugality or thriftiness pushing me toward saving a quarter or fifty cents through my choice of beverage.
I had no idea I was being a sucker.
A sucker in this sense. Once I’m in the coffee shop, I’ve already decided to make an impulse purchase—and unlike when I’m making a deliberate purchase for which I’ve considered price and value, I am essentially paying no attention to price or value.
Which costs more for a coffee shop to make—a cappuccino, a mocha, or a white-chocolate mocha? I had no idea and wasn’t stopping to think about it for one moment. In turn, I had no idea if the prices I’m being charged are matching up with the coffee shop’s costs.
Tim Harford’s book, The Undercover Economist, peeled back the curtain, using the examples of a hot chocolate, a cappuccino, a mocha, a white-chocolate mocha, and a 20-oz. cappuccino at Starbucks:
Every single product on the menu above costs Starbuck’s almost the same to produce, down to the odd nickel or two…
Despite the costs being the same, Harford gives the wide range of the prices for these five products from his local Starbucks in Washington, DC (presumably circa 2005, when the book was published): $2.20 for a hot chocolate; $2.55 for a cappuccino; $2.75 for a mocha; $3.20 for a white-chocolate mocha; and $3.40 for a 20-oz. cappuccino. Harford brings the point home by noting that the mocha is just the hot chocolate and cappuccino mixed together and the white-chocolate mocha is the same as the mocha except for use of a different powder.
So while I was blowing off the difference of about fifty cents in ordering a white-chocolate mocha, I was actually paying at least 23% more for the same drink as a mocha—or arguably 54% more for a glorified hot chocolate.
Harford explains that I’m essentially Starbuck’s most-desired customer:
By charging wildly different prices for products that have largely the same cost, Starbuck’s is able to smoke out customers who are less sensitive about the price. Starbucks doesn’t have a way to identify lavish customers perfectly, so it invites them to hang themselves with a choice of luxurious ropes.
By the way, Harford does not paint Starbuck’s as evil, from my read—and in fact, far from it, he points out many other businesses do something quite similar and discusses many such practices by supermarkets.
But the imagery of hanging myself with a luxurious rope will stick with me, I think. Is it frugal, cheap, or something else if I order the cappuccino and hot chocolate and mix them together myself?
Better yet, next time I see the coffee shop, I’ll just keep on walking.