You might have seen recently that
iconic retailer JC Penney
is slumping badly. You almost certainly have seen the reason why: A
massive, creative and aggressive new advertising and pricing campaign that
promises simplified prices.
No more coupons or confusing
multiple markdowns. No more 600 sales a year. No more deceptive circulars full
of sneaky fine print. Heck, the store even did away with the 99 cents on
the end of most price tags. Just honest, clear prices.
Sounds like a sales pitch aimed
at consumer advocates and collectors of fine print frustration, like me. As it
turned out, it was a sales pitch that only a consumer advocate could love.
Shoppers hated it.
The campaign, which launched on Feb. 1, appears to be a disaster.
Revenue dropped 20 percent for the first quarter compared to last year.
Customer traffic fell 10 percent. Last year, the company made $64 million in
the first quarter; this year, it lost $163 million.
Could we have a moment of silence
please for what might be the last heartbeat of honest price tags?
Not only did Penney’s plain
pricing structure fail to attract fair-minded shoppers – business reporters wrote with seeming glee during the
past few days that it “repelled”
them.
Don't blame Ellen DeGeneres, the
spokeswoman for the Penney’s plain pricing campaign. If only executives at the
firm were familiar with the work of behavioral economist Xavier Gabaix and the
concept of "shrouding," all of this could have been avoided.
Seven years ago, Gabaix and
co-author David Laibson wrote a brilliant (if depressing) paper on shrouding
and "information suppression" that
should be required reading for
all consumers and executives considering a harebrained new pricing
strategy. The principle is simple, and shows why cheating is rampant in
our markets and why honesty is rarely the best policy.
First, a definition of shrouding:
In days gone by, price tags were
simple. An apple cost 10 cents. A cup of coffee cost $1. But today,
the consumer
marketplace is far more
complicated, giving sellers the opportunity to create confusion. Many items
have follow-up costs that make the original price tag meaningless.
Computer printers are the classic
example. You might get a great deal on a printer, but if
the ink is expensive, you lose in the end. In fact, Gabaix argues that it's
impossible for consumers to intelligently shop for printers. No consumer knows
how much ink costs -- the cartridges don't come in standard sizes, the amount
of ink used to print varies and ink costs are unpredictable. That makes
the true price of a printer "shrouded," in Gabaix's terminology. Not
quite hidden, but not quite clear, either. Advantage seller. It's
easy for printer companies to lowball printer price tags and overcharge for
ink, enabling them to print money.
If you think about it, shrouded
price tags are everywhere. The hotel website might say "$99 a
night" but you know the bill will be more like $120 or $130. Pay TV
companies promise $30-a-month service, which ends up costing more like
$50. And what happens when you buy a TV with a store credit card that offers an upfront discount but a
complex interest charge? And so it goes.
Consumers complain about this
constantly. That's the basis of the Red Tape Chronicles in fact. At its best,
the maddening mixture of coupons, rebates, sales and fine print fees can feel
like a game. At worst, it's being cheated. You'd think shoppers would love
a chance to buy from a store that doesn't play these games, the way car buyers
(allegedly) like shopping at no-haggle auto dealerships.
They don’t, says Gabaix, and
Penney should have known better.
“I think it was an ill-advised
move,” he said.
All this price manipulation is
really an information war, he says. Shoppers hunt for the tricks that let
them save money. Stores hide booby traps that let them take
money. It's a bad system, one I've labeled "Gotcha Capitalism."
But it is the system we have now.
And it's simply impossible,
Gabaix argues, to be the one company that attempts to bridge this information
gap. If a firm tries to educate consumers on tricks and traps, and tries
to offer an honest product, a funny thing happens: Consumers say, "Thank
you for the tips," and go back to the tricky companies, where they exploit
the new knowledge to get cheaper prices, leaving the "honest" firm in
the dust.
“Once you educate consumers on
the right way to shop, they will seek out the lowest cost store, and that will
be the one with the shrouded prices,” he said. “Once they are savvier
consumers, you make less money from them.”
Gabaix calls this the "curse
of debiasing." And it leads to this depressing conclusion: "Shrouding
is the more profitable strategy."
To oversimplify for a moment,
here's Penney's problem. They told the world that retailers only offer
their best prices during crazy sales, and Penney stores would no longer host
them. Sensible consumers apparently took that information to heart and
decided to simply wait for such sales at other stores. As an added benefit,
Penney lowered consumers' search costs, because they now knew they didn't need
to bother driving to a Penney’s store anymore.
That's probably not what new
Penney CEO Ron Johnson had in mind when he decided to spend his marketing
budget on those witty DeGeneres ads. A former Apple Inc. executive who took the
Penney’s job in November, he thought he was lifting the store out of the brutal
commodity clothing market. He may ultimately succeed at that. But he won't do
it by telling customers the firm's pricing is fairer than at other stores,
Gabaix believes.
"It will be a very, very
uphill battle," Gabaix said. "So, sorry for them."
There have been a few other
celebrated efforts by companies to educate consumers that their higher prices
are really lower prices after hidden fees. During the last decade,
Intercontinental Hotels experimented with up-front pricing that included all
fees on its website. Executives at the firm told the New York Times that
customers left in droves, choosing competitors with lowball prices.
More recently, Southwest Airlines
has undertaken the most aggressive anti-shrouding campaign to date, picking on
other airlines' baggage fees. The profitable carrier is holding its own with
its "Bags Fly Free" campaign, but there are indications that the firm
won't be able to resist all that free money forever. In what may be a sign of
things to come, Southwest elected to leave AirTran's baggage fee structure in
place after it acquired the competitor last year.
Shrouding isn't the only reason
Penney's pricing plan is flawed. The firm is also leaving a lot of money
on the table by rejecting a phenomenon known as "price
discrimination." Some people have more money than time, and some have
more time than money. Some shoppers don't mind spending hours to save $20;
others would gladly give a store $20 to escape quickly. Smart retailers
get money from both. By killing couponing, Penney has eliminated its
ability to satisfy price discriminators.
And as others have pointed out,
markdowns serve the age-old retailing trick of "anchoring." For some
reason, even very smart consumers feel better paying $60 for something if you
initially tell them it costs $100, and then reduce the price.
But the real problem is Penney's
ill-fated attempt to cast itself as the only fair poker player in a game of
cheats. Shoppers just aren't buying it. However unsophisticated consumers
are, very few of them believe a pair of shoes bought at Penney's everyday low
price will be cheaper than a pair of shoes bought at Macy's on clearance with a
25 percent off coupon.
________________________________________________________________________
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