Friday, June 27, 2008

Price of Mineral Water and Beer

Why is a Bottle of Water More Expensive Than a Bottle of Beer?

Beer incurs a significant tax. Excise duty on beer costs upto 50% of the price. Therefore, you would expect a beer to cost 50% more than water. Yet, if you go into a bar, you will probably find that a 500ml bottle of mineral water costs more than beer. Why do firms put a higher profit margin on water than they do on beer?

1. Quantity consumed.

People who buy water, are probably the kind of consumer who will be sitting in the bar, nursing their water for several hours. Therefore, that customer is not a profitable customer. However, someone who buys a beer, is much more likely to buy several beers. Downing several mineral waters, just doesn't have the same effect as enjoying several beers. Therefore, although the profit margin is smaller per item a beer drinker is probably more profitable in total than a water drinker.

2. Competition.

When trying to attract customers, you will advertise the price of beer, not of mineral waters. It is the headline price which will attract the most attention from consumers. If you are going to spend a night in a bar, the price of mineral water is not a big deal; but, the price of water is probably much more important.

No comments: