Pricing Hot Sauces in a Broken Market

Friday, March 13, 2015

Interesting things happen when the normal rules just don't work. In economics, we typically describe such environments as "broken markets." One such case: the market for hot sauces.

Every year, millions of people utter the following phrase:

I like spicy food.

But there is a growing subset of folks who don't just like what most people would call "spicy" - they're willing to go to extreme lengths to find the ultimate rush. They are ready to shell out cold hard cash to purchase pepper sauces that would cause mere mortals to break out in cold sweats and start shaking uncontrollably.

There's just one problem: it's nearly impossible to look at the average bottle of hot sauce and determine whether it's intended for normal folks who like things "spicy" or for the madmen who remain unsatisfied by anything less than sulfuric acid.

While a recognized standard exists to estimate the spiciness of a pepper sauce, few sauces print their scores directly on the bottle, forcing customers to make random guesses as to which product best meets their needs.

Like any case of asymmetric knowledge in a marketplace, this leads to economic inefficiency. Customers are less willing to spend money on products that they haven't used for fear of wasting money on a sauce that doesn't meet their criteria. Indeed, I have been burned many times by weaker-than-expected hot sauces.

So why don't companies simply label their products appropriately? I can think of several reasons:

The firms that produce the hottest sauces must find a way to differentiate themselves so that they can charge premium prices to their niche audiences. They should advertise their Scoville scores front and center. Mid-tier sauce manufacturers (catering to those who are less knowledgeable than pepper-addicts) would do well to compare their products to more mainstream brands in their advertising. While a measure like 10,000 Scoville units may not make sense to their customers, a messages like "five times hotter than Tabasco sauce" would. Meanwhile, the lowest tier of products can continue doing what they're doing. Soon, the word "hot" will become completely devalued, and (ironically) change into a term that tells those seeking a burn to look elsewhere.

Want to learn more about how to price your products? Pick up a copy of my software pricing manual or contact me for a private consultation.