Monday, August 1, 2011

Price and Sustainability: What is Overpriced Tea?

One of the recent blog posts that I greatly appreciated was Lainie's post about The Price of Tea, which references a great post on the Tea Geek Blog, Whose Tea Is That?, discussing how different companies will sell the same batches of tea (often for different prices). Price is one of my favorite topics, and I think I would like to write about it more than I do, so here goes:

I also think that in the end, being price-conscious as a shopper, not just for tea, but for everything, is crucial to achieving sustainability. Our financial decisions, which include all purchases, shape the organization of labor and distribution of resources in society. When we buy goods for a fair price, we are participating in a normal, healthy economic activity. When we buy undervalued goods, we are often helping to dispose of excess goods or helping a company to regain losses if they have an overabundance of something. But when we buy overpriced goods, we are giving money (and thus power) to someone who has not provided a proportional amount of value. Buying overpriced goods thus is bad for the economy as a whole--that is my philosophy, which I know does not agree with some economists' theories. Economists who would argue otherwise probably argue that consumerism is a good thing, and spending money for the sake of spending it is somehow desirable. Who believes in that? I sure don't.

What is overpriced?

The notion of something being overpriced is necessarily subjective. There are different ways of looking at price and value, and I will outline two of them. In either way, however, the core idea is value. It does not matter so much what the price of something is. For example, with tea you might examine price per ounce, per pound, per tea bag, or even per cup. However, these prices are distinct from value, which is the more subtle and elusive concept of what you're getting for your money.

It's often worth paying more money if the product is better tasting. You might even save money if you are able to make more infusions from a set of tea leaves, or get by with using less tea leaf because the tea is so intensely flavorful.

Value as assessing the quality of good itself:

Arguably the most important aspect, or at least most immediately evident aspect of value is the quality of the good itself. In the case of tea, the quality encompasses the flavor, aroma, and to some degree, appearance and ease of brewing of the tea leaf.

However, value does not exist in a vacuum, and there are other things besides the innate qualities of the good, and its price, which influence value.

Value as relative:

If tea were a very scarce commodity, it would probably command a high price. On the other hand, if it were easy to grow and process in a temperate climate, like mint, it would probably not be as expensive in countries like the U.S. or U.K. Value also depends on possible substitute goods.

The value of a specific type or batch of tea is also dependent on the price and value of similar teas. If you can buy an identical or nearly indistinguishable tea from a different company, you will probably see the higher-priced of the two offerings as overpriced. And if you can buy a similar, but slightly different tea for a much lower price, you are also likely to see the one tea as overpriced as well. For example, the existence of inexpensive but high-quality se chung oolongs often makes me a little pickier about the quality of Tie Guan Yin, and more likely to perceive Tie Guan Yin as overpriced unless it is absolutely top-notch.

Value as holistic economic concept:

There is one more way to look at value, and that is to look at the whole supply chain from the tea growers and harvesters through all intermediate parties to the sale, purchase, and brewed cup. In this paradigm, the value depends not only on the quality of the good itself, and possible substitute goods, but also on the amount of profit taken out of various points in the supply chain, and the effect that the production of the product has on the various communities, people, and businesses along the way.

This way of thinking about value is relatively new, in part because in the past, most if not all of this information was hidden from people buying tea. But with the information age, there is greater transparency, and this holistic view of value is becoming much more popular and widespread, and I actually believe it will eventually become widely accepted in the mainstream. It is this holistic view of value that is the underpinning of the philosophy of fair trade.

The teas that one might classify as "overpriced" can differ hugely if one uses this holistic sense of value, vs. if one uses the conventional sense of value. For example, one might be comfortable paying a modest premium for a tea produced by sustainable methods by a small farmer-owned cooperative. On the other hand, one might be more likely to label a tea as overpriced if one knew that it had a high markup at the point of sale, with only a negligible portion of the sales price reaching the original producers.

What does overpriced mean to you?

How do you personally think about value, when it comes to tea? Do you look at the quality of the tea alone, or do you consider where the tea came from, and the markup involved at various steps of the sale and distribution of the tea?


  1. To me, an item is over-priced if I can get somewhere else for lower price the similar quality, similar standards (organic, fair trade etc.), similar service level (store environment, packaging, etc.)

    In China, for the same item, I can get from the internet for $10, or I can get from a fancy city mall for $70. I don't know if that should be called over-price, but most of them time I would get it from the $10 source. A lot of things sold in US and made in China have prices of many, many folds than what they cost from the factories. But then there is service and commercial costs involved. So I am not sure if that's called over-price.

    In tea world, when it's from the same wholesaler, sold at different retailer for price difference larger than 3, I would definitely call it over-price, unless the expensive seller provide massage service :-p

  2. What you say makes sense to me, Gingko. I do think value can be added but when the markup or price difference gets too big, I start to get skeptical.

    Also, even when the costs / finances are more transparent and no one is taking a huge profit, I would not conclude that extra value is being added just because the business selling the product has incurred extra costs.

    For example, if you rent a storefront in a high-end shopping mall, you probably pay exorbitant rents. It might be a good business decision to incur these extra costs, but from the shopper's perspective, the shopper is now paying money into the whole commercial real-estate system, rather than the tea industry.

    I'd almost rather have a retailer taking more of a profit than breaking even and paying more money into the commercial real estate sector, which is often all about speculation and is not the most sustainable industry.

  3. Today I chatted with a tea friend we talked about "crazy profit", which is actually another aspect of over-price. The business style of a lot modern big companies is, they make a decision on the final price first, and then decide on their production costs based on how much profit they want. Then, crazy profit causes low quality product. This is basically why most Chinese tea imported to the States are of low quality. The tea can be sold for low prices, but the importer's profit is maximized because the cost of the tea is extremely low and only a small fraction of the final price. Related to what you said about price and value, a tea can be of very low price but even lower value.

  4. Hi! Im a tea lover from Slovakia and student of financial math and economics too :-)
    -Spending for the case of spending is bit out when we talk abou tea market, it matters more in Keynesian Macroeconomics and this topic is more about Microeconomics I think :-)
    Prices in tea market should be divided into two categories: Market in the tea producing regions (apart from the lower salaries it is not a problem to find a good tea for low price)
    But now lets talk about tea markets like Europe or USA. These markets are highly monopolistic or at the best olygopolistic.
    And one funny fact- tea consumers are very similar to drug addicts in economics :-D Elasticity of the demand for tea is highly nonellastic I think :-D for example if the weather in Darjeeling is bad and smaller quantity of tea is produced -> higher prices, but you buy it anyway :-) So thats the reason why tea is bit overpriced nearly everywhere outside tea producing regions :-( But more than price I care about the quality of the tea and its authenticity- why buy a low cost falsificate? I like to buy from honest vendors that sell high quality teas even if it means higher price :-)
    P.S. sorry for my english, Im not a native speaker and its hard to write about such things for me..

  5. This is really good food for thought as a tea retailer - thanks Alex.

    It's such muddy waters this issue of pricing/quality. The biggest issue is defining 'absolute quality' vs. customer satisfaction.

    For example, I could sell a tea that is wildly expensive, and really great quality, but if an average non-tea-geek consumer buys that, I'd suspect they wouldn't enjoy it. And would they pay £60 or £70 for a little bag? They might be happier with a cheaper tea that is packaged well, given a good story, and comes with a great intangible value from marketing/branding.

    So I think it's really unclear - for tea reviewers, you have to be pretty sure you're tasting *exactly* the same tea to compare two companies, and perhaps accounting for the intangible aspects as well as service, packaging, reliability etc.

    For tea retailers, there's a big responsibility to source reliably. Understanding the market, not just buying based on price, not over paying for what you're buying etc. Another tea retailer recently told me that they could buy 'the same tea' in America cheaper than they can in China. What that says to me perhaps is either (a) they don't know teas, or (b) they're getting ripped off in China.

  6. Yeah! I've definitely seen companies that I suspect are taking crazy profits. For example, I can buy Temple of Heaven Gunpowder green tea in Chinatown for 69 cents per 125 gram box...and (a) it's really not bad quality and (b) you know the store selling it is still making a profit. Then I know when I try a gunpowder tea from a retailer, and it's not as good as that reference tea, but it's sold for a higher price, I know someone is getting ripped off.

    And as minrivertea points out, it could be the retailer who is getting ripped off from a supplier (either in China or here in the US).

    One thing that really shocks me sometimes is how people get into the tea business without knowing much about tea. I would hardly consider myself a connoisseur...I would say I have (a) basic research skills (b) basic comparative shopping skill, and (c) I like to sample / taste things. Sometimes, I've tried a tea from a company, and I'm pretty sure that that company did not sample 3 or more different sources of that tea, because if they did, they would know that they can get a better product and sell it for cheaper while still making a big profit.