The Beer on the Beach Experiment (Re-visited)

By Greg Eyres, Consulting Director at PricingProphets.com

In the 1980’s or 1990’s (I can’t remember which), the Chicago University –based Behavioural Economist Richard Thaler conducted what has become known as the “Beer on the Beach” price experiment.

He asked participants in the research how much they would be prepared to pay for an ice cold beer purchased from a run-down corner store at one end of a beach, and what they would be prepared to pay for an ice cold beer from the upmarket hotel at the other end of a beach.

As you would expect, participants were prepared to pay more when the beer was purchased from the latter, vis-a-viz the former. But as I discovered last week, this is not quite what happens in Fiji.

I was staying at a 3.5 star resort on one of Fiji’s many islands.  Very much marketed as a family resort, it offers just about everything a family could want.  It sits on a bay with spectacular views from the bar and restaurant. Most importantly, it offers a Kids Club where the ankle-biters can enjoy time away from their parents. 

At the other end of the bay is another resort that is much more marketed to couples and honey-mooners.  It is a 4 star resort that again offers spectacular views of a tropical paradise.

A glass of the house wine at the 3.5 star resort costs $11 (Fiji dollars).  What do you think a glass of the house wine costs at the 4 star resort?  Well, to my way of thinking, it would be reasonable to expect that it would something more than $11 - maybe $15.  Probably a better quality wine and a more exclusive and tranquil setting.

In fact, the 4 star resort charged us $5 for glass of the house wine.  Why?  Have they made a reasoned decision or are they pricing incorrectly?

At the 3.5 star family resort, what is the value of the glass of wine?  Mum and Dad have saved up all year for the annual holiday, the 2 kids are in at Kids Club, the sun is shining and they are finally starting to relax.  Are they going to pay the $11 or walk for 10 minutes to the other resort, where they can’t charge their drinks to their room?  Easy answer – they ain’t walking!  What they are really paying for is relaxation and a chance to unwind.  Walking around to the other resort will cut into that time and as any parent knows, that time is golden.

So, what of the 4 star resort?  My wife reliably informs me that the wine there was not as good a quality, although reasonable enough.  It is a beautiful setting and the accomodation and common areas are certainly of a better standard.  Why are they serving lower quality wine at a low price?  It clearly looks like a case of offering the wrong product at the wrong price.  A low quality, low price wine is incongruous with the quality of a 4 star resort.  They should be offering a premium wine at a premium price. 

In contrast to the 3.5 star resort, this resort is selling quality and quality products.  Pricing should reflect quality.  They may even attract a few mums and dads from the other resort who are seeking a better wine.

Having said all that, I don’t drink wine so it makes no difference to me.  I had a great time relaxing and snorkeling … while the kids were at Kids Club.