There’s a really interesting article in today’s NY Times Business Section titled “Sometimes, We Want Prices to Fool Us.” It’s about how the “everyday low pricing” model at J.C. Penney’s seems to have backfired. One explanation is that many consumers don’t necessarily want “fair prices” or “everyday low prices,” they instead want the thrill of getting a great deal when something is on sale, to feel that rush of “consumer surplus” running through their bodies! And sometimes those “deals” are an illusion, because the sales prices are heavily discounted from an artificially high price — but maybe we want “prices to fool us” as the title of the article suggests.
I think the J.C. Penney example illustrates how incredibly complex and unpredictable consumer psychology and behavior are. For example, consumers seem to accept everyday low prices at Walmart, Sam’s Club, and Costco, but that pricing strategy didn’t work at J.C. Penney. That’s why you have to sympathize with the challenging task of being a producer, seller, or retailer — they can’t ever perfectly determine consumer tastes and preferences, and therefore have to use a continual process of trial-and-error and experimentation to figure out what products consumers will buy, and at what price. Not an enviable position to be in, to be at the mercy of fickle and unpredictable consumers. Producers can’t ever really “get inside our heads” as consumers to figure out what we want and what prices we’ll pay, they just have to guess, and that’s why only a minority of new products and companies are ever really successful and profitable – it’s always a mysterious guessing game that’s hard to win!
Here’s an excerpt from the NY Times article:
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.”
Even Walmart, which actually does pull off the trick of “everyday low prices” in its domestic stores, is finding it hard to convert consumers to a single-price model in countries like Brazil and China, where retailers give deep discounts on a few main products, then mark up the rest, said Mark Wiltamuth, an analyst at Morgan Stanley.
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.”