Supermarket shelves are low on branded milk stock as consumers purchase more expensive brands in support of local farmers.

The dollar milk phenomenon is a marketing ploy that works brilliantly. It convinces us the place we shop is cheap, and allows the store to rake in profit.

Dollar milk relies on the fact we can’t memorise the price of everything in the supermarket. Most of us know the exact price of a few items. Milk and bread, bananas and apples, those sorts of things.

Milk stands out among those things because it is the most generic — the differences between brands are slight. (Petrol price competition is the same thing only moreso.)

So of course milk is the best thing to cut the price of. Mostly we happily choose the lower-price option and remember how amazingly cheap it was.

Items we buy less often are where the profit making happens. Who knows if $4 is the right price for an occasional purchase like garbage bags? What we remember is the cut-price milk, and that gives the whole supermarket an aura of cheapness.

It sounds so simple it couldn’t possibly work. But it does — and it works beautifully.

Australians are rallying around its dairy farmers by opting to purchase branded milk rather than the cheaper store brands.Source:Getty Images

MILK: THE NUCLEAR OPTION

Coles was the aggressor in the milk wars. It cut prices back in 2011, and while Woolworths followed suit, it did so kicking and screaming.

“We are very forthright in saying that this is not a price war we would have started,” said a Woolworths spokesperson at the time.

What happened next is retail history — Coles, which was Australia’s supermarket loser, slowly got up off the mat. Down, Down went the song; Up, Up went the stock of its owner Wesfarmers. Coles eventually overtook Woolies to become the fiercest competitor in the fight to survive. Milk is a big part of why.

In 2011, a huge campaign to convince us Coles was cheap had become urgent. The reason was a little German upstart called Aldi. When it came to Australia in 2001 and it was seen as a curiosity. By 2011 nobody was underestimating it.

Aldi, according to independent surveys, is cheaper than Coles and Woolies. Not just a little bit, a lot.

The average price of a basket of groceries. Source: CHOICE.Source:Supplied

Sure, Aldi puts this data on its brochures, but it doesn’t stick in the mind quite like the memory of $1 milk.

If Australians shopped via completely rational evaluation of prices, Aldi may have stormed the market even more comprehensively. Instead, we form our preferences in an ad hoc manner. And that’s why Coles surprised us with $1 milk.

A SLIP OF THE MIND IN AISLE THREE

The suggestibility of shoppers also explains the other great phenomenon of milk.

Milk is never right there at the checkout. It is down the back. Past the chocolate. Past the chips. Past the anchovies and the frozen berries.

This is not a coincidence. Milk goes off and we need to buy it reasonably often. While you’re in there for a couple of litres, the supermarket is desperate — desperate — to get you to buy something else.

Look at that end-of-aisle display of Arnott’s biscuits! So tempting! Etc. This is the concept known as the Gruen Transfer — you enter a shopping mall or large store and the layout is disorientating enough to prime you for unplanned purchases.

Dollar milk relies on you buying something else while you are there. The profit margin is slim to nil, and it only works if you fill the trolley with items that have more fat built into the price tag.

We can all probably afford slightly more expensive milk if we pay a bit more attention to the other things we casually throw in our trolley.

Jason Murphy is an economist. He publishes the blog Thomas The Think Engine. Follow him on Twitter @jasemurphy.