Tim Hortons, the Canadian donut chain, just did all this brilliantly. Hortons simply shifted the size of all of its cups up a notch: a “small” is now a “medium,” a “medium” now a “large,” etc. Hortons notes in its fine print that this “isn’t a change in the price or actual amount of beverage” — which means customers will pay the same per ounce of coffee. At first, this seems a fair deal, but now consider the likely scenario.
A regular customer walks in and orders her “medium” coffee in the morning … and is handed a larger cup. With more ounces. At a greater overall cost.
Our customer, bleary-eyed and thirsty for her Morning Joe, has a choice — return the coffee for what now has a “smaller” size name, or keep the larger size. If she sticks with the new cup size, she’ll be ordering more coffee every day, and pay more for it. Yet she walks out carrying a larger cup, feeling like she’s getting more at Tim Hortons after all.
This form of pricing is called “price obscurity,” a clever ploy to gain more revenue per sale by making it difficult to judge what you’re really getting. You’ve seen this before at movie theaters that give you a strange, extra-large size box of candy that costs $4 or $5. Is that a good deal? Of course you can’t tell, because the packaging obscures the value of the candy inside. If you’re still confused, play Hortons’ strategy to the extreme, and imagine if ordering a “small” coffee returned you a gallon that cost $30. Is that still a good deal?
Tim Hortons may not be charging more per ounce, but it is charging more per “size,” and sizes are what coffee customers order. Well played, Hortons. We bet your profit on this new pricing will be extra large.