Sex sells. On the street corner, in advertising, in the family planning aisle, and whenever you want to drive a lot of traffic to your blog...But seriously, there is an interesting Challenge Dividend case study underway in the condom market; and while I am personally not in the market for condoms, I am not embarrassed to wander down the condom discussion section of the Internet in order to reveal an interesting coupling of business and human nature.
Over the weekend the economists' blog, Marginal Revolution, led me to a study on the cost of condoms from a web site called My Science Project. In addition to experiments such as "Can You Light a Jell-O Shot on Fire?" and "Does Viagra Keep Flowers Fresh?", the site examined the oddity of condom pricing.
Like most products and services, prices are higher when you buy a few and lower when you buy in bulk. Working at P&G for several years, we even had formulas to guide what the discount per ounce of Tide should be when you buy a 300oz versus 100oz.
But the variation in price-per-condom is staggering. For example, see these differences in pricing for Durex condoms, which is fairly representative of multiple retailers and brands:
- Walgreen's, 3-pack for $3.99, or $1.33 each.
- Walgreen's, 36-pack for $22.99, or $.64 each.
- CondomDepot.com, 1000-pack for $149, or $.16 each.
Clearly there is something strange going on in this market. There is no real difference in the cost of packaging 3 condoms versus 36, so the retailers and manufacturers are pricing according to what consumers will pay, not using cost-based pricing. But why would consumers pay so much more for less? It seems that most people would use 36 condoms over time, especially since the shelf life is 4-5 years. Why not save money in the long term? My Science Project offers a few ideas:
- Failure to do the math. People are just reading the overall price, and not comparing the per condom price. This actually happens a lot at Dollar stores. The price per unit or ounce is usually higher than Wal-mart, for example, but people see the low absolute price and feel like they are saving.
- Embarrassment. A 3-pack is more discrete than a 36-pack. You can hide it in your hand or easily mix it up with some other products you don't need to get past the eyes of the cashier. Walking around with a giant 36-pack might leave the manliest stud a little shy. This is a real benefit that adds value to the consumer, so should be priced in.
- Convenience/Poor Planning. When time is tight, you can buy a 3-pack, discard the box, and slip the units into your pocket. This, too, is an added value to the consumer.
- Mentality of sexual scarcity. People don't want to buy products that have risk of going to waste. People without regular sexual partners might not think they need 36 condoms.
I believe all four of these theories have some validity, but I would add a few more related to the Challenge Dividend:
- There are few competitors in the market, and buyers cannot compare. The condom itself is a fairly low-tech, commodity product, but only a handful of brands are available - such as Trojan and Durex. And unlike most over-the-counter medications, there are no store brands. I believe the reason is that the cost of condom failure can be very high, which is part of why brand names are so important - they generate trust. And unlike OTC medicines, you cannot compare "active ingredients" among the branded and non-branded alternatives.
- Retailers sell few, so keep prices high. As a general rule, fast moving packaged goods are sold by retailers at lower margins. Products like milk and detergent bring people into the store and are "loss leaders" that retailers price low. But other categories like makeup, water filters, and condoms sit longer on the shelf and fill more specific consumer needs. There is less pressure among various retailers in a market to compete on price on these niche items. This is where they make up on the low milk and detergent margins.
- Consumers are not pressuring for cheaper condoms. At the end of the day, the value of sexual activity is much, much greater than the $.67 savings per condom. Let's say that the "value" of an encounter is
$250 $500$1000 (Oops, dangerous ground here). So if you save $.67, then the value is improved by only .067%. That's probably not worth the effort.
But the good news is that the condom market is much more competitive today thanks to Internet ordering. As shown above, you can buy several years worth of condoms for yourself - or a few weeks worth for your fraternity - for a rock bottom price of $.16 each. Not only does the Internet offer lower prices, but it adds value in the form of a non-embarrassing shopping experience.
Of course, I believe every young man should have to go through the right of passage of buying condoms at the store in his lifetime. It is a personal "challenge" that proves one's courage and resolve!