eli5, how do “store brands” work?
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It’s a way of extracting more profit out of a single product, by selling to different market segments at different prices.
If there is only one price for beans, then the manufacturer has to trade off between volume produced and profit per tin.
For example, as a group, “beans customers” might be willing to buy 100 tins at $1 each. If the price is $1.10, let’s say that twenty fewer people will buy beans, which means they can sell 80 tins at $1.10, Let’s also say they can sell only 10 tins at $2, to the people that really like beans and are willing to pay that price.
If each tin costs $0.80 to produce, the profit earned on all the sales in each case is 0.2 times 100=$20, 0.3 times 80=$24, and 1.2 times 10=$12. So the manufacturer will choose to make 80 tins, and sell them at $1.10, because this is the most profitable price and sales volume for them.
But, if the manufacturer can sell branded tins at different prices with the same product inside, they can make more profit.
If they price “bargain-beans” at $1, “decent beans” at $1.10 and “fancy beans” at $2, and buyers believe that the products are different quality, then they will be able to make more money. This is because they can sell more beans in total (to the customers who can’t afford $1.10, but can afford $1), and also sell some of their beans at a higher per-tin profit than the earlier optimum price (to the 10 customers who are willing to pay up to $2 for beans).
The products are often slightly different, to justify the different branding, but the perception of what a product is worth is largely psychological rather than based on the attributes of the product itself. Nobody’s out here buying all three kinds of tinned beans and comparing them – life’s too short- so people often use price and presentation as a mental shortcut for quality, and assume that they are getting better because they are paying more.
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