Leave your cards at home.

Consider yourself  at a famous departmental store, where you chance upon a stylish pair of boots being sold for $79. You don’t really need new boots but they are beautiful and there’s always room for one more. Assuming you had the money, would you buy them?

Now imagine another situation where you happen to be in the same store on a new day. The sales man tells you the same pair of boots, actually worth $99, are now being sold for $79. If you had the money, would you buy them?

Assuming you decided to buy the boots in both circumstances, the latter situation would probably make you happier at the time of purchase, and for good reason, because you saved $20. Retailers are well aware of this feeling a discount or a deal on a product begets & unfortunately, some may act to exploit this very fact. One way of doing this is by using high initial mark up prices and then offering a discount, creating the illusion of a ‘good deal’. American retailer Macy’s was found inflating the price of a Cuisinart food processor, by quoting a regular price of $139.99 and a ‘sale’ price of $99.95. However upon further investigation, Cuisinart’s manufacturer reported $99.95 as the regular price of the food processor*.

Retailer JC Penney was a proponent of the aforementioned marketing strategy, until Ron Johnson was appointed CEO in 2011. Johnson believed the pricing policy followed by JC Penney took a consumer’s intelligence for granted. He soon replaced it with a radically new one that consisted of

1) removing the ‘fake marked up prices’

2) eliminating discounts and deals, thereby quoting fair, ‘everyday low prices’ and

3) eliminating the use of coupons.

While this may have been done in good faith, it caused JC Penney a $163 million net loss within the first quarter of implementing the policy*.If we were rational decision makers, we would always favour a pricing policy that maximised our gains and minimised our losses. However our behaviour often deviates from what standard economic theory deems rational. Behavioural economics gives us some insights as to why Johnson’s policy failed.By removing deals and offers, JC Penney eliminated the perceived scarcity that was associated with the products in question. One of Robert Cialdini’s six principles of persuasion, perceived scarcity states that when people view something to be scarce, it generates greater demand.

Perceived scarcity drives sales. Attractiveness and desirability towards a product are enhanced by perceived scarcity*. Sales and discounts are usually offered for a limited period of time and therefore, one could say that sales are associated with perceived scarcity. While the product supply itself may be in abundance, the ‘deal’ is viewed as being scarce. In the JC Penney case, by making all merchandise either ‘Everyday saving’ or ‘Clearance’, the feeling linked to a unique deal was removed, therefore reducing the product’s desirability (believing that a product is worth more than what you bought it for is likely to add to its desirability). Moreover in this case, the consumer does not face any urgency to buy the product.

The removal of coupons was another major flaw in Johnson’s strategy. Behavioural Economist Dan Ariely emphasizes the concept of the ‘pain of paying’, which is the tendency of human beings to experience psychological pain when paying for a purchase. Interestingly, the pain of paying is greater when people pay by cash, than when they pay by credit/debit cards. Ariely posits that this could be because paying by cash makes parting with the money more salient and this increases the pain of paying. Coupons substitute cash and can be purchased in advance for later use, thereby making parting with the money less salient at the time of purchase. By eliminating the use of coupons at JC Penney, regular coupon users were likely to experience the pain of paying more often.

The next time you go to the shopping mall, leaving your cards at home and paying by cash might just help you avoid buying those beautiful pair of boots that you don’t really need. Shopaholic or not, I dare you.

To know more about the concept of the pain of paying, check out Dan Ariely’s video on the topic http://danariely.com/2013/02/05/the-pain-of-paying/ or read this interesting article http://www.neurosciencemarketing.com/blog/articles/austin-sushi.htm

Some references for the JC Penney case-

http://business.time.com/2012/05/17/why-jcpenneys-no-more-coupons-experiment-is-failing/

http://www.dailymail.co.uk/femail/article-2345121/Bargain-hunters-beware-How-sale-prices-discounts-stores-mark-original-cost-20-sticker-slapped-on.html

 

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6 thoughts on “Leave your cards at home.

  1. Leigh Caldwell

    Not sure that scarcity is a big driver in this case (though I can see how it could come into play). More significant is that consumers don’t know the “correct” value for a garment (if such a number even existed), so it’s hard for them to know whether a price represents good value. If they are given a signal that the “true” value of what they’re getting is higher than the price they pay (e.g. “$50 reduced to $20”) that gives them a credible signal of what the garment might be worth. This assumption about value lets them believe that they’re getting a good deal, and makes them more likely to purchase. Without a promotion, there’s much less reason for the consumer to think they’re being offered good value.

    Reply
    1. karishmarajaratnam Post author

      That is an interesting insight, thank you 🙂 I think it is quite multidimensional, an understanding of the value of the product can work with perceived scarcity in this case. Once the value of a product is realized, perceived scarcity of the discount could kick in, creating a sense of urgency to buy the product. So if a consumer encounters a product worth $99 being sold for $59, once the original value of the product is understood, the fact that it is a deal (which would typically run out) creates a sense of urgency to buy, making him/her go ahead with the purchase. I think viewing it to be a deal that will run out soon increases its desirability. The modern consumer also has an abundance of resources to stay updated and informed of the value of certain products in the market..

      Reply
    1. karishmarajaratnam Post author

      Hey! Personally, I’d choose the store-wide 50% discount as it gives me more opportunity to get different products that I want, at a cheaper price. Buy one get one free promotions that I’ve come across are usually limited to the range of products on which the discount is being offered…for example buy a pair of jeans and get the next one free. However maybe I don’t want TWO pair of jeans, but I want a pair of jeans and a top to match it instead? So yeah, I’d definitely prefer to see H&M or Zara go on a 50% store wide sale, rather than give me a buy one get one free offer 🙂

      Having said that though, I wonder how I’d feel if H&M changed their pricing policy to 50% off, all the time…..

      Reply
  2. Dhvanil Raval

    I immediately thought of what Dan Ariely calls Price Anchors when I read this post. I think that’s what Leigh was talking about in an earlier comment. You make the consumer set an anchor at $99 and then offer a $20 discount, the consumer immediately sees a benefit which might not necessarily exist in actuality.
    Interestingly, as a part of my business management course, I had conducted a study on a small sample of Indian e-commerce users which strongly suggested that the regular Indian e-shoppers have wearied considerably of this price anchor strategy. There are simply too many websites which operate on a discount-based business model. So many, in fact, that for Indian e-retail, discounts on the marked price are a point-of-parity. It just ensures that a customer stays on your website; he might not necessarily make a purchase. Which has a lot to say about the long-term implementation of the anchor pricing strategy. Maybe Ron Johnson was right, and this wasn’t the best strategy. It is too easily copied,loses appeal, and once you get in, it pretty difficult to get out without making a loss.

    Reply
  3. karishmarajaratnam Post author

    Hello 🙂 Yes, anchoring is definitely operating here. I find anchoring such an interesting bias to explore.That is a very interesting piece of info about the e commerce! If the retailers are making losses because of this strategy, it doesn’t seem very surprising after reading the JC Penney case does it? 24×7 Discounts are far from the answer. Indian retailers could definitely use insights from the behavioural sciences, I think there’s a lot of scope for it here.

    Reply

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