22 August 2012

What’s the Price of a Kilogram of House? Or of a liter of Tooth Paste? … Prices and Units of Measure

Prospect theory teaches us that virtually any value is perceived as a gain or a loss depending on a reference point. Another teaching of prospect theory is that any value is “big” or “small” only relative to a reference point.

I’ve remembered this a few days ago when I was shopping at Albert Heijn (the main supermarket chain in The Netherlands for who does not know). I guess there’s some sort of regulation that makes retailers give the price of a product also per unit of measure. For most products this is usually very intuitive from the perspective of official and perceived units of measurement.  

For example if someone buys meat, that person would want to buy, let’s say, “two pieces of chicken”. At the same time the person is quite aware that chicken meat is measured in kilograms and that those two pieces of meat weight around 300-400 grams. Similarly if someone wants to buy orange juice, that person would buy “a bottle”, but at the same time he or she is aware that “one bottle” is about 1 liter. 

For most products we buy at a supermarket there is a very natural correspondence between the informal (or perceived) unit of measure (e.g. a box of milk) and the official unit of measurement – one liter. In this case, expressing prices in both “per selling unit” (box, bottle etc.) and in official units of measurement (liter or kilogram) makes perfect sense and I think it is really benefic for both customer and retailer.

At the same time, in supermarkets but not only, there are products for which the transition from informal to formal units of measurement is not that easy an intuitive. One day I wanted to make some mint tea (or maybe it was mojito??) and decided to buy some fresh mint (plant). I saw a very nice “bunch” (the informal unit of measurement) of mint on a shelf and stretched my arm to get it… that was when I saw the price per kilogram label and everything changed. The “bunch” of mint was less than 2 Euros which for a non-frequent purchase seems reasonable… but it weighted only 15 grams. When I saw the price per kilogram – namely 92.67 Euros I was blocked… How much can Mint cost??? (by the way, fresh basil costs the same, while the prices for other spices are really “spicy” – up to 200 Euros per kilogram).

Another example of severe discrepancy between informal and formal units of measurement is “mints” (mint drops). Although I try not to make impulse purchases, one day I yielded and on the way to the cash register I grabbed a “box” of Smint (mint flavored drops). I couldn’t help myself and I looked on the label for price per unit. The small box (informal unit of measurement) of Smint was so cute and was priced only at a bit below 2 Euros, but the price per kilogram was around 170 Euros… That was really a shock, so I got the bigger box which was priced at only 55 Euros per Kilogram.

Here’s some food for thought: How much does a liter of Printer Ink cost? In case you had a shock, get a glass of water.

Now, how much do we actually pay for the stuff we buy and how should we think about our purchases? I remember that a real estate agency (don’t you just love real estate people??) started to communicate prices of houses not by the square meter, but by the kilogram. What they claimed was that “a Kilogram of house” doesn’t cost much differently than a kilogram of regular groceries. For sure I think that a Kilogram of house is cheaper than a liter of printer ink :).

These are more extreme examples, but as I can remember a kilogram of detergent is priced very close to a kilogram of meat and the examples can continue. Should we see our shopping more in terms of official units of measurement or should we stick to the informal ones? What do you think? 

Latter edit: Read also "The Most Expensive Thing in a Supermarket"

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