Retailer – Real Basket Value in Retailing

Extreme couponing is not only one of these weird shows on TLC, it’s also more and more a way of living for many households. Since January is generally one of the months where households spend less and are looking to save money in opposition to the bloody months of November and December, I thought it was a timely moment to write a post related to this topic. This post takes a mom blogger approach blended with some of my old-style economist thinking to decorticate the “Real Basket Value” equation and suggests that some extreme couponing behaviors may increase the “Real Basket Value” instead of decreasing it. This post is written purely from a customer perspective rather than from a retailer perspective. So let’s get it started by presenting the “Real Basket Value” equation related to a specific transaction at a retailer:

Basket Price + Direct Costs + Externalities = Real Basket Value

Basket Value - It's Not Only What's in the Basket When Shopping at a Retailer
Real Basket Value - It's Not Only What's in the Basket When Shopping at a Retailer

Basket Price

Let’s first start with the easiest part of the equation, the Basket Price. The Basket Price is defined as the nominal price of all items included in the basket you will buy at a retailer. This is the price you happily or unhappily see on your bill.

Direct Costs

Direct costs may be restricted to distance costs, which can be defined as the additional costs related to the act of moving from point A (Generally your home or your workplace) to point B (the retailer where you will buy your items). These distance costs may include the amount for gas you will spend to make the distance and the depreciation cost of your car related to this particular ride. In some cases you may fix these costs at 0, while in other cases, they may be not as negligible.

Externalities

Externalities are forgotten by many households since they may look frivolous, but the reality is that they may, and sometimes should, have an impact on the “Real Basket Value” equation and
on the final decision of: (1) where to shop/buy, (2) what to buy and (3) in how much quantities? An externality is defined as a cost or benefit that is not transmitted through direct prices.

Most importantly, externalities include time costs. As Benjamin Franklin stated, “time is money”, since time is a scarcity that can be associated to a particular opportunity cost. Some components of “Time costs” are a function of distance costs while some others are not. For instance, the time spent in traffic to reach a retailer is a function of the distance cost while the time spent searching for THE discount is not.

Furthermore, many other costs and benefits could/should also be taken into account. These include: (1) the benefits associated to the loyalty programs points you are gaining in buying what you are buying, (2) the stockpiling costs, (3) the costs or benefits associated to how much life expectancy (including medical costs) you are gaining or losing buying high or low quality food, and (4) the costs or benefits associated to your joy of buying (and most importantly thereafter consuming) a certain type of product that is offered at a particular retailer.

More About the “Real Basket Value” Equation

To fully take advantage of this humble equation, you can do a quick benchmark between two or more retailers or run the equation again by manipulating components of this equation. Thereafter, using heuristics (habits or shortcuts) may be the optimal way to reduce the “real basket value” by cutting useless overthinking.

Conclusion

Happy new year to everyone, enjoy the year 2012 shopping efficiently and don’t spend too much time finding THE “right” coupon since “time is money”.

Cheers,

Jean-Francois

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