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Seduced by the almighty discount

The rise of the 'price consultant' has made retailing -- and discounts -- into a science.

January 17, 2010|By William Poundstone

Remember when Apple slashed the price of the iPhone, and the brand's fanboys were upset? That's how many holiday shoppers felt this year.

It used to be that, when a store sold something before Christmas, it was making an implicit promise to defer any steep discounts until after the holiday. But clearly that rule has gone the way of "no texting at the dinner table." Just as politics has become a permanent campaign, retailing is entering the age of the permanent sale.

This past holiday season, "doorbuster" sales began before Thanksgiving. Retailers -- both on the Internet and in the malls -- slashed prices early and often during December, and then, on Dec. 26, the real sales began. A few days later (with fewer gift cards burning holes in pockets), stores cut prices yet again.

Why? Without question, retailers were spooked by 2008's dismal holiday sales. This year, the malls adopted the Internet philosophy: draw the eyeballs; worry about monetizing them later. Indeed, the competition between Internet and bricks-and-mortar retailing -- played out most dramatically in a price war between Amazon and Wal-Mart -- contributed to 2009's ever-expanding sale calendar. Web sellers tend to have longer price promotions, and the malls have had to match that. But there's another factor at work. In recent years, marketers have forged an exact science of discounts. Aided by a new breed of professional, the "price consultant," they've become expert at pushing our buttons.

Suppose you were in a store and saw two similar flat-screen TVs. One costs $879; the other is $899, marked down from $1,049. Which would you rather buy?

Most people pick the one "on sale" -- even though it's $20 more than the one that's not on sale, and even though they don't know if it's any better. Like so many of our consumer products today, TVs are too complicated for the average consumer to intelligently compare. (Show of hands: Who's read their TV's manual?) We infer quality from prices. In this case, consumers automatically assume a $1,049 TV is "better" than an $879 one.

In high fashion as well as in high-tech, price is the index of desirability. Jimmy Choo pumps are better than Steve Madden pumps because, well, they cost more. But here's the insidious thing: We're sophisticated. We know that there's a lot of air in some prices and that advertised "original" prices have to be taken with a grain of salt. That original price might have applied for about 20 minutes in October, in anticipation of discounting it. Or, as the fine print says, "Intermediate discounts may have been taken." Today's cynical shoppers adjust for all that (discounting the discounts) and still conclude that a marked-down item is likely to be better than a similarly priced item without a discount.

Dubious discounts go back to the days of the Yankee traders. What's new is the flood of quantitative data provided by bar codes and Internet sales. The data demonstrate that shoppers (even mobile-Internet-enabled ones) are not as rational as they think. In the new understanding, prices are a collective hallucination. Buyers are sensitive mainly to differences, not absolute values -- to discounts, not "everyday low prices."

Price consultants use this psychology to engineer sales and rebates -- a project that is not so altruistic as it sounds. As the profession's patriarch, Hermann Simon, once put it: "Willingness to pay must be exploited to the full."

Like ninjas, the power of price consultants resides in the invisibility of their methods. We all assume that we can judge whether a price is a good one and won't be fooled by sleight of hand. But the sales data tell a different story. Even the experts can be fooled by their own tricks. Donald Lichtenstein, a University of Colorado marketing researcher, told of shopping for a tennis racket. He found himself paying as much attention to the discounts as the purchase prices: "I knew better, but I just couldn't help myself."

Ten years ago, the pitch for the Internet was that shoppers would never again have to pay full price for anything. As the saying goes, be careful what you wish for -- you might get it.

William Poundstone is the author of "Priceless: The Myth of Fair Value (And How to Take Advantage of It)."

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