Research suggests poor may pay more at the store

Mar 1, 2016

Low income households end up paying more per-unit than middle income households, a new study from the University of Michigan finds.
Credit Steve Carmody / Michigan Radio

You know when you've got $20 to spend on groceries, and you need paper towels?

So you head over to that aisle and, of course, it's cheaper per-roll to to buy the huge bulk package. But you just don't have $17 to drop on paper towels this week. That $20 needs to buy food, too.

So you buy the 4-package roll, or if you're really strapped, the single roll.

That's a common - and surprisingly costly - cycle poor people get trapped in, according to researchers from the University of Michigan.

"Say they save about $50 dollars a year because they buy cheaper products," says Yesim Orhun, a professor at the Ross School of Business.  "They actually could have saved an additional $25 dollars, if they also bought more often in bulk."

Her team is wrapping up a study that finds low income households are less able to take advantage of basic savings opportunities at the store, including buying large packages of common household goods.

And it's not a lack of awareness. It's a cash-liquidity issue, she says. When low-income households do have cash on hand (say, right after paycheck) they’re more likely to buy in bulk and to just generally stock up when there’s a great sale.

But when that cash runs low, they end up having to buy relatively expensive things again (like a single roll of toilet paper) and that ends up hurting their budget a second time, too, she says. Because when you run out of a toilet paper, you’re not exactly able to wait around for a sale. So you buy what’s on the shelves, even if it’s more expensive than you’d like.

"They miss out on the second opportunity of, being able to buy at the best price they can," says Orhun. "So it hurts them twice."

Orhun’s study also suggests that this isn’t just a “food desert” or access issue. Even if you’re within walking distance of the store, if you don’t have enough cash, you still can’t take advantage of good sales or bulk buys.

Still, there are some possible solutions, Orhun says. For one, stores could offer lines of credit on purchases of bulk items. That could lock in customer loyalty, she suggests.

"We may see retailers kind of step up in the game, in order to not lose these customers. These customers are actually pretty profitable, because, as our study shows, they pay more than middle-income consumers do at a per-unit base,” Orhun says. "It's not so much, I lose money on the toilet paper today. It's more, I gain this account and keep it for a long time."

Orhun and her co-author, Mike Palazzolo, are making last minute touches to the study as they submit it to a journal for publication.