[Economic Irony] The High Cost of Living Frugally

This article originally appeared as a research focus on Michigan Ross’s website. The research it is based on recently received the 2019 Paul E. Green Award for contributions to theory, methods, and practice in marketing.

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

That’s according to our research, which shows that people with low incomes are less able to buy in bulk and move purchases forward to take advantage of sales.

Using Nielsen data on toilet paper purchases, we find that while low income households 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.”

“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,” says Orhun. “It’s a double whammy.”

Our data show that low-income households pay 5.5% 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% 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.

“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.”

A. Yeşim Orhun

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,” Orhun says, “and it matters even for what we’d consider small purchases.

 “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 toilet paper). Manufacturers could offer promotions to encourage people to buy larger packages. This could also help lock in customers and help manufacturers avoid losing sales to brand-switching.