Why the poor pay more at the store

February 25, 2016 by Greta Guest

Turns out you have to make good money to save money.

That's according to new University of Michigan research that found that people with low incomes are less able to buy in bulk and move purchases forward to take advantage of .

Using Nielsen data on toilet paper purchases, Yesim Orhun and Mike Palazzolo of U-M's Ross School of Business showed that while low-income tend to buy cheaper brands to save money, a large proportion of that savings is lost because these households buy smaller package sizes (at a higher unit price) and don't utilize sales as often.

Worse, the relative inability to buy in bulk and on sale has a compounding effect, exacerbating the "poverty penalty," they say.

"Because they have to buy small quantities, they have little inventory at home and can't wait until a sale presents itself to purchase again, making it even harder to take advantage of sales," said Orhun, an assistant professor of marketing. "It's a ."

The researchers say that low-income households pay 5.5 percent more per roll of toilet paper than they would if they purchased more like high-income households—that is, if they bought in bulk and on sale more often. By contrast, low-income households save 11 percent on their toilet paper purchases by purchasing "cheap" brands.

Consequently, roughly half the savings low-income households reap by purchasing lower-tier brands is sacrificed because they struggle to buy in bulk and on sale.

The analysis also shows that it's not simply a lack of knowledge or awareness of sales and bulk discounts that drives the problem. There is also a cash flow issue. When low-income consumers have more liquidity—after getting their paychecks, for example—they do take advantage of bulk discounts and sales.

"It's not about poor people making poor decisions—it's about them facing liquidity constraints, and it matters even for what we'd consider small purchases," Orhun said. "Clearly, the government can play a role in easing liquidity constraint by making credit more accessible. However, government action isn't the sole potential source of liquidity relief."

Can retailers or manufacturers do anything about it? Possibly.

Retailers could extend low-interest lines of credit to consumers for everyday items like . Manufacturers could offer promotions to encourage people to buy larger packages, Orhun said. This could also help lock in customers and help manufacturers avoid losing sales to brand-switching.

Explore further: Sales influence consumer food shopping habits

Related Stories

Sales influence consumer food shopping habits

September 22, 2014

(HealthDay)—Consumers are more likely to buy high-calorie foods (HCF), but not low-calorie foods (LCF) on sale, according to a study published in the U.S. Center for Disease Control and Prevention's Preventing Chronic Disease.

Good cause + moderate discount = more sales

November 11, 2014

Many businesses now offer customers the opportunity to make charitable donations to good causes along with their purchases, but does this really encourage the customer to buy more? According to a new study in the Journal ...

Study examines return policy effect on consumer behavior

January 19, 2016

In 2014, product returns totaled about $280 million across all U.S. retailers. New research from UT Dallas examined existing studies on return policies to quantify the policies' effect on consumers' purchase and return behavior. 

Recommended for you

New paper answers causation conundrum

November 17, 2017

In a new paper published in a special issue of the Philosophical Transactions of the Royal Society A, SFI Professor Jessica Flack offers a practical answer to one of the most significant, and most confused questions in evolutionary ...

Chance discovery of forgotten 1960s 'preprint' experiment

November 16, 2017

For years, scientists have complained that it can take months or even years for a scientific discovery to be published, because of the slowness of peer review. To cut through this problem, researchers in physics and mathematics ...

4 comments

Adjust slider to filter visible comments by rank

Display comments: newest first

Jeffhans1
5 / 5 (1) Feb 25, 2016
Also cheaper goods almost always have planned obsolescence built in as well. They are designed to need to be replaced much sooner than higher end models such as washing machines, air conditioners, fans and most goods sold in the US at least.
deluxestogie
5 / 5 (1) Feb 25, 2016
Bulk purchases (e.g. 12 rolls of paper towels, or 24 rolls of toilet paper) require substantial storage space, which is not a problem for the owner of a McMansion. A small, rental home poses challenges for convenient storage.

The elderly may find that simply handling a huge package of paper products problematic. And it often has to fit into a less capacious vehicle for transport home.
RMQ
5 / 5 (1) Feb 25, 2016
The rich make money out of the poor, not a secret.

For example, who goes to prison in the USA? mostly the poor. Who makes money of the people in prison? prison's owners, lawyers, etc... obviously the rich...

Who gets sick the most? the poor. Who gets financial benefits from the poor being sick? physicians, pharmaceutical companies, hospitals, etc.... the rich.

Who goes into the military as soldiers? the poor. Who gets financial benefits of military invasions? the owner of Halibut, the weapons builders, the pharmaceutical companies, hospitals, etc... the rich again...

Who has high divorce rate? the poor. Who gets financial benefits from the destruction of poor families? Lawyers, psychologists, psychiatrists, pharmaceutical companies, prisons... the rich.
MR166
not rated yet Feb 26, 2016
Also some poor neighborhoods have high crime rates and shoplifting is a real problem. Thus the larger chains move out leaving only the smaller much more expensive stores.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.