July 11, 2008

Why do bars charge for water but give peanuts for free?

Last night I bought a book at Heathrow Airport on my way back to Brazil. It's called The Economic Naturalist - Why Economics Explain Almost Everything, by Robert H Frank. Half way through the book and I immediately got hooked on how the author presents basic economic principles using fun day-to-day situations. The book takes the reader on an interesting journey on why many strange things we find in everyday life actually make perfect economic sense.

The narrative is carried out through intriguing questions. One particular question presented was very useful for me: "Why do many bars charge customers for water but give them peanuts for free?" One of the product categories we have in our portfolio in Brazil is snacks. Over the years we haven't had the same success in bars like we have in other channels. So, I was obviously intrigued by the question. This is how the author answers it...

"The key to understanding this practice is to recognize that the terms on which bars offer water and nuts are dictated by the effect of these commodities on demand for bars' core product, alcoholic beverages. Nuts and alcoholic beverages are compliments. Someone who eats more nuts will demand more beer or spirits. Since nuts are relatively cheap and each alcoholic drink generates a relatively high profit margin, making nuts free available tends to increase bars' profits. By contrast, water and alcoholic beverages are substitutes. The more water bar customer drink, the fewer alcoholic beverages they will order So even though water is relatively inexpensive, bars have an incentive to set a high price for it, thereby discouraging its consumption."

It seems obvious, but I believe marketers (including myself) do not always work so intensely on trying to find channel insights as much as we do when it comes to consumer insights.

The book is fascinating to understand how almost everything that happens around us can be explained through economics.  Cool stuff.

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