Petrol price elasticity, and supermarket vouchers

As we all know, when the price of something goes up, we buy less of it. For some products, we’ll change our behaviour significantly (holidays or books, perhaps). For other products, we just grit our teeth, hand over the credit card, and don’t manage to cut down our consumption much. Petrol and cigarettes are the classic examples of this: what economists call “inelastic goods”.

The elasticity of petrol in New Zealand is estimated at around -0.15, which means that when the price goes up by 10%, we’ll only buy 1.5% less. That’s pretty inelastic! It’s often thought that New Zealand is much less responsive to petrol price changes than other countries, probably because we have such poor public transport, and are a spread out country. However, this may not be the case for all situations. Firstly, the petrol price rises over the last decade were almost unprecedented, and we may reach the point where petrol eats into our budgets so much that we simply have to cut down. Secondly, there have been some interesting changes in the last decade, including the introduction of petrol discount vouchers at supermarkets.

Petrol prices, 2004-2014. Ouch.

Supermarket petrol discount vouchers have been a fact of life for almost eight years, and they’re still widely used. Surveys by Canstar Blue show that almost 80% of Kiwis visit particular petrol stations based on their price promotions – although the surveys don’t say how often people use the vouchers.

So, people do seem quite willing to change their petrol buying habits based on these vouchers. That’s not a costless process – you might have to drive a bit further to get to the petrol station which accepts your voucher, which costs you time and a little bit of money. You also have to hang on to the vouchers, figure out which one is which, enter the code, wait a little longer at the till and so on. The thing is, though, for a voucher offering 4 cents off a litre, the discount on the pump price is only 1.8%. For 6 cents off, the discount is 2.7%. That’s pretty tiny, and most retail stores wouldn’t even bother advertising discounts this small. And yet, when applied to supposedly inelastic petrol, it can be pretty effective.

At the other end of the scale, Z Energy have very openly taken a different approach – they’ve steered away from heavy price discounting, and pitched themselves as offering better service instead. They’re targeting the customers who are happy to pay a few cents a litre if they get a better experience. No doubt that’s a sensible move, if the other big companies are positioning themselves in the price competition space.

So, what does this all tell us about consumer behaviour? Looking at elasticity figures across an entire country can be a little misleading. Within any customer group, there’ll be those who are more price sensitive and those who are less. The “holy grail” for any business is to figure out which is which, and charge the less “price sensitive” people more! Discount vouchers are one way of doing this, as the people who are most likely to bother with them are those who are the most sensitive to price. There’s probably a fascinating study hiding here – and we might find that Kiwi consumers are more complex than the old figures suggest.

Initially written for RCG’s News In Brief, original version here

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