Pricing

Coffee and Coefficients of Variation

By Christine Carragee
January 29, 2013

$3.87 – That’s how much my coffee and oatmeal usually cost at Caribou. Sometimes though, it costs $4.23 or sometimes it’s as little as $3.47.

This price range represents revenue opportunity for the coffee company for a couple of reasons. The main reason is that forty odd cents is such a low percentage of my food budget that it has no impact on my buying behavior.
As much as having a hobbit-like second breakfast appeals to me, I’m not trying to get fat, just fed and caffeinated, so it will always only be one oatmeal and one coffee for me.

coffeandoatmeal Why does my price vary you may ask? Looking back at my receipts for the past few months I’ve noticed that I’m getting different discount types on different days. Some days a bundle discount for purchasing both items together of about $.50. I’m also often receiving a $.50 discount for bringing my own mug, which is sometimes applied in addition to the bundle discount.
I also occasionally get an employee discount of 10% because the shop is located within a large corporate office.

This employee discount is one I’m probably not entitled to, as a contractor. It was probably designed as form of price segmentation to entice those who could cook at home to have breakfast at work anyway, maybe even on a regular basis. My impostor status notwithstanding, it is bad business to extend discounts to segments who don’t require them. As a contractor, on site for a project, I have fewer breakfast alternatives and am more likely to be willing to pay full price.

If I had this transaction data in Profit Analyzer, I could check out the Price Waterfall chart and quickly see the value of each of the discounts as negative adjustments. I could get a count of the instances when I was charged each price using my price band chart.

If I were concerned that this price variation for the same product/customer combination was a broader problem across multiple products, I could also use a scatter chart, roll-up by Customer and band by Product and look at the measure for Coefficient of Variation of Invoice Price. Coefficient of Variation is defined as the Standard Deviation/Average Price, which gives me a normalized measure of variation for whichever pricepoint it is applied to – in this case Invoice Price. In my coffee/oatmeal case Coefficient of Variation of Invoice Price is roughly 10%, but if I looked at it across customers and store locations it would probably be higher.

The difference between the highest amount I pay $4.23 and the other prices a small windfall for me, but across millions of customers could be big bucks for Caribou. Presumably, there is an analytics group working on capturing some of this consumer surplus. I wonder if they have a pricing specific analytics program to help them identify and capture this opportunity because starting with paper invoices is painfully slow.

– Christine Carragee

  • Excessive Margin Variation , Vendavo Profit Advisor

    Christine Carragee

    Christine has a diverse background in pricing analysis and implementation across industries. As a pricing practitioner, she has worked in both B2B and B2C environments and collaborated across functional areas to improve margin performance. Applying her passion for data analysis, Christine has helped Vendavo customers to anticipate their data and reporting needs during requirements gathering in anticipation of the on-going the value realization process. Another component of her work has focused on corporate education and training; ensuring strong project ROI through user adoption and increased pricing understanding.