There’s Nothing Shoppers Hate More Than … Honest Prices?

Libby Kane
Posted

We love to beat retailers at their game: We know why the price tag ends with $0.99, we know that there’s a ridiculous markup on a generic pair of jeans and we know that the “compare to” price at outlets is fictional.

All we want is honesty! We want to know exactly what we’re paying, when we have to pay it and how much it will cost us in the long run. Right?

If that’s the case, how do you explain the nosedive JC Penney’s profits took after their new CEO instituted an honest prices campaign, where the store declared it would stop engaging in standard, deceptive industry pricing practices like fine print, coupons, gimmicky sales and even prices ending in $0.99?

In the first quarter alone, they lost $163 million.

The failure could have been prevented–if JC Penney execs had been familiar with a concept called “shrouding.” We’ll explain how this pricing strategy helps part you from your money, why JCPenney missed the mark and how you can find the most affordable, honest prices out there.

The Pricing Trick We All Play

Shrouding is exactly what it sounds like: hiding the real price under layers of markups, markdowns, sale prices and follow-up costs to get consumers to pay as much as possible while making them think they’re getting a deal.

Economists Xavier Gabaix and David Laibson, authors of the paper that defined the concept, give a particularly relevant example: the bank account. Let’s say you open a “free” bank account. You probably don’t take into account the potential, unadvertised ATM fees, overdraft protection fees, bounced check fees, minimum balance fees or any other follow-up costs the bank tacked on in the fine print.

And it’s not just financial products. Think you know how much your printer costs? (Ah, but you didn’t add up the cost of the ink.) Your silk shirts? (Dry cleaning.) Your airline tickets? (Processing, tax and baggage fees—although these could soon go the way of the Dodo bird.)

Gabaix and Laibson break shrouded prices down into two categories: add-ons, which are avoidable, and surcharges, which are not. An add-on is something like the mini-bar in a hotel room, which you know costs extra and can avoid, and a surcharge is something like a low-balance fee on your bank account, which you simply can’t avoid if you don’t keep enough money in it.

Where JC Penney Went Wrong

In trying to present consumers with the most honest, upfront prices, Penney assumed—or hoped—that said customers would so appreciate their effort and ethics that they would flock to the stores. They were wrong.

Bob Sullivan of MSNBC’s “The Red Tape Chronicles” breaks down the reasons Penney’s strategy didn’t work nicely:

1. Gotcha Capitalism

We’re operating in a system sometimes called “Gotcha Capitalism,” where both retailers and consumers know we’re playing an elaborate game to figure out who gets our money. And we like it. We won’t opt out, even if the other side (the retailers) tries to call a truce. When one company tries to call that truce and educate consumers about the tricks they fall victim to, the consumers take that knowledge and exploit it with other retailers, where they can “win.”

2. Price Discrimination

JC Penney has abandoned “price discrimination,” which allows retailers to take money from both shoppers who have more time than money (and will spend that time couponing and gaming the system) and shoppers who have more money than time (who will pay the asking price just to get the heck out of there). In offering only one price, the department store is excluding the income from shoppers with more time than money.

Not sure which consumer you are? We can help you figure it out.

3. Anchoring

Getting a skirt for $50 marked down from $200 is much more satisfying than just buying a $50 skirt. Thus the concept of anchoring: By presenting a higher price, sellers alert consumers that no matter what they’re spending, they’re getting a deal. And we fall for it. Let’s say you could spend $25 on “full-priced” sunglasses at JC Penney or use a coupon elsewhere to pay $30 for sunglasses normally priced at $50. Even though $25 is less than $30, which do you think is the better deal?

Could Honest Pricing Ever Work?

Not unless everyone in an industry does it. We as consumers are aware that retailers are trying to trick us out of our money and our behavior rewards the companies who play the game. After all, if they don’t play, how can we win?

The thing to keep in mind when playing the game is that it all comes down to how much money leaves your wallet. If your Financial Inbox shows that you spent $15 on flowers, that’s it. It doesn’t matter how much they originally cost, how much your friend paid for them or how much they would be uptown.

There are also unavoidable surcharges, which are in fact avoidable if you a) think of them before buying the product b) ask about them and c) buy another product with fewer or no surcharges instead.

It all comes down to this: There is a game, and you win by keeping the most money in your bank account.

And, in meantime, here are nine ways most stores try to seduce you into spending more.