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Why Consumers Want Prices to Fool Them

Posted by admin on 4/22/13 11:00 PM
Topics: college retail, sales strategies, textbook affordability, price comparison

The following excerpt, from the article For JC Penney a Tough Lesson in Shopper Psychology, was written by and and published in The New York Times. Although the concept of simplified pricing does not necessarily pertain to textbooks (students always want those prices as low as they can get), it could have an impact on the way you advertise your apparel.

Learn even more about the psychology of discounted prices by reading the full article.

When, a little over a year ago, J. C. Penney stopped promoting sales and offering coupons and instead made a big deal about its “everyday” low prices, Ms. Fobes stopped shopping there. It wasn’t that she thought the prices were bad, she said. She just wasn’t having any fun.

“It may be a decent deal to buy that item for $5,” said Ms. Fobes, who runs Penny Pinchin’ Mom, a blog about couponing strategies. “But for someone like me, who’s always looking for a sale or a coupon — seeing that something is marked down 20 percent off, then being able to hand over the coupon to save, it just entices me,” she said. “It’s a rush.”

Devoted coupon users like Ms. Fobes may be more frugal than the typical consumer. But most shoppers, coupon collectors or not, want the thrill of getting a great deal, even if it’s an illusion. In recent months, Penney recognized that human trait and backtracked on its pricing policy, offering coupons and running weekly sales again. And it started marking up items to immediately mark them down for the appearance of a discount.

Simplifying pricing, it turns out, is not that simple.

For sellers, setting and holding one price makes plain, economic sense. “You’re always going in and changing prices and that takes manual labor,” said Ronald Friedman, retail practice leader at the accounting firm Marcum. “Also, if you have one price, you have a better feel for expected margins and gross profits, you can manage to your budgets a lot better, and it’s more efficient.”

It also leads to more stable inventories. “It makes the operations side of things much easier to predict,” said John T. Gourville, a marketing professor at Harvard Business School. “You don’t have these whiplash effects of selling, say, a ton of Diet Coke one week and virtually none the next week.”

The problem, economists and marketing experts say, is that consumers are conditioned to wait for deals and sales, partly because they do not have a good sense of how much an item should be worth to them and need cues to figure that out.

Just having a generically fair or low price, as Penney did, said Alexander Chernev, a marketing professor at the Kellogg School of Management at Northwestern University, assumes that consumers have some context for how much items should cost. But they don’t.

“J. C. Penney might say it’s a fair price, but why should consumers trust J. C. Penney?” he asked. “At the end of the day, people don’t want a fair price. They want a great deal.”

Consumers infer that they get a great deal based on the reference point provided by the higher, presale price. Social scientists refer to this idea as anchoring, and it applies to all sorts of consumer behavior and expectations. Without that anchor, consumers have trouble determining whether the store is actually giving them a good price.

Even the words a retailer uses in its marketing can affect how a customer judges a deal — “sale” or “special” leads people to think the item has a high value, but a straight markdown leads them to think it’s a cheaper item, according to a study in the Journal of Retailing.

“Instead of having a lot of variable pricing on individual items, across all items they can guarantee you’ll get the lowest price for your basket,” said Pradeep K. Chintagunta, a marketing professor at the University of Chicago Booth School of Business.

Penney did not offer anything so clear. The chain told customers to expect low prices — but not the lowest prices.

“Walmart is able to tell customers exactly how much they’re saving compared to a local supermarket,” Professor Chintagunta said. “But what am I gaining now by shopping at Penney’s, 20 percent on average? Ten percent? Penney’s couldn’t communicate that, and consumers couldn’t make an assessment about whether it was worthwhile to go there.”

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