By Willy Staley  Fri Aug 10, 2012

Put That Lobster Down! (Maybe)

Robert Banh/flickr source

This week, the Harvard Business Review checked in on the New England lobster market to teach us all a lesson about pricing. It turns out, not all goods respond to supply and demand forces in the same way. Lobster, in certain environments, doesn’t really respond at all. What does this mean for the savvy consumer?

The HBR reports that, due to a bumper crop, wholesale lobster prices in New England have plummeted. Lobstermen are emptying their traps and getting a 40 year low price of, in some cases, under $2 per pound. Just last year, they were getting twice that. Does this mean you can go up to your favorite clam shack in Maine and eat yourself sick on lobster for a song? Sorry, guys, that’s not how lobster pricing works:

With cheap wholesale prices, consumers must be benefiting by paying less for lobster, right? Not necessarily. Yes, prices at Boston grocery stores have dipped to as low as $3.99 per pound. Similarly, a “Cantonese style” twin lobster dinner at a restaurant I frequent in Chinatown has dropped from $24.99 to $19.99. However, at my favorite upscale restaurant, prices have not budged — a lobster roll platter is still close to $30. Similarly, prices for picked lobster (meat removed from the shell) at retail outlets have remained constant too.

Strange, right? Rafi Mohammed explains that what we’re seeing here is two different sorts of pricing at work: value pricing and cost-plus pricing. Cost-plus pricing is something anyone who has worked in retail should be familiar with. Retailers typically want a fixed margin above cost. On the wholesale side it works similarly, explains Mohammed:

If a product costs $100 to manufacture and a manager wants a 50% gross margin, the cost-plus price would be $150. While easy to implement, the downside is these prices have no correlation to what consumers will actually pay. When you are buying a product, do you evaluate prices with a dictum that they can’t be more than 50% of what it costs to manufacture? Most of us don’t.

To price something properly, explains Mohammed, you need to “capture the value of your product relative to your customers’ next best alternatives.” So with retail stores and Chinatown restaurants, there’s plenty of competition to drive lobster prices toward their market value. But at your favorite Cape Cod roadside restaurant, or upscale lobster spot, there’s something known as a vacuum pricing environment, where value pricing dominates: “Because of the unique value they provide, these businesses don’t have to lower their lobster dish prices to remain competitive,” writes Mohammed.

Counter to Mohammed’s argument, however, is that most lobster platters consist of a boiled lobster with corn-on-the-cob and drawn butter. You don’t have to be a Michelin-starred chef to melt butter or boil water, but you might have to be brave to kill a living animal in boiling water in your own home — but much smarter people have written about this ethical dilemma. As far as you wallet is concerned, you’d be much, much better off buying lobsters retail, at a price that approaches fair market value. A 1.5 pound lobster platter in New England likely goes for somewhere north of $25, while the thing might retail for $6 (and the restaurant gets it wholesale for less). That said, who wants to fuss with killing animals while on vacation?

Well, what’s $20 worth to you? Would you pay $20 to avoid the hassle of melting butter and boiling a living thing in a vacation rental home? It very well might be. Vacationing in touristy areas makes us constant victims of vacuum pricing environments — what is a tourist trap if not a pure example of this: something of low value, that supposedly exists nowhere else, and typically costs an arm and a leg?

Knowing the actual value of things can help you know to steer clear of these places and experiences, but it can also be quite stressful to circumnavigate. As a vacationer, you have to know how to properly balance your wallet’s needs with much-needed R&R. It isn’t easy to say with any certainty what’s right or wrong. In that way, it’s kind of like boiling lobsters alive for your own gustatory pleasure.

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