Monday, May 26, 2008

What can we learn from gas prices?

I just caught this CNN article on the current state of gas (fuel) prices in the US. According to the article, the month of March 2008 saw the single largest fall in 'driving' by US residents since records began in 1942 - a 4.3% decline (or 11 billion fewer miles if that percentage decrease didn't feel large enough).

The fascinating thing about this reaction is that it's almost pure sticker shock. The article talks of whole families foregoing Memorial day camping vacations to set up tent in their backyard! As if the cost of gas has become so great as to preclude using it at all.

But this just isn't the case. Yes, the average gallon of gas in the US is now just shy of $4 ($3.93), but it's only 70c more than it was a year ago. 70c per gallon translates into $10-$15 more for a tank depending on your car (more for a large SUV). Those aren't break-the-bank numbers.

The reason for the decline is the price points that people are now seeing - $60, $70, $100 fills. When you are used to $46.73 for a tank and you hit $60, sticker shock kicks in - that familiar feeling of 'it can't be that much? Really?'.

As human beings. our thought process in the face of rising pump prices is:

I can handle that.
That's a lot, but within my budget.
Woa, that's pretty high, grin and bear it.
No, that's way too high - kids, we're camping in the backyard this year!

We hit a ceiling. A threshold that we can't/won't pass. We don't, as many people think, gradually reduce our level of demand at each increase. It only looks like that in aggregate.

This has implications for marketers setting prices. While you look at the overall numbers and see this perfect relationship between price and demand on aggregate, think instead of the thresholds you've crossed.

You need to ease people across thresholds. Good sales people know this instinctively. Marketers less so. But they also have the harder job.

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Tony said...

My office and my daughters daycare is within a 1/2 mile from my house. My wife has a government issued vehicle. So the gas prices don't really affect us until we go on a long trip, which we did this last weekend. Otherwise, if the price was $10 or $15 a gallon, it wouldn't matter. I feel for traveling sales people who now find their car allowances don't nearly cover their expenses...

I remember when putting $5 in the tank could almost give you a quarter. Now it's just over a gallon. I don't think we will ever see prices back down to $2.

Paul Soldera said...

I think if the oil companies have their way, they will stay high for a long time. Well after the global price for oil falls.

Maybe that's not a bad thing.