In this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp bring you a December warning at least as important as the one given by Jacob Marley: Beware! Advertising gurus and marketing maestros have peered into your psyche and they know how to make you buy. And buy. And buy more. And every year, when shopping season arrives, they pull out every tool in their arsenal.
One technique has become so ingrained in our buying habits that not only do we not get annoyed about it, but we apparently demand it: Retailers give items high base prices that they don't really expect us to pay, so that they can "cut" them, or offer coupons, and show us how we're getting a "good deal." And then there are more esoteric tricks, like "charm pricing" and math hacks.
A full transcript follows the video.
This video was recorded on Dec. 5, 2017.
Alison Southwick: Let's move on and talk more about pricing, shall we?
Robert Brokamp: Let's do it.
Southwick: Particularly sales and anchoring. And anchoring is going to come up again, because anchoring also plays into the decoy effect and some other things. It's all interwoven.
Pricing and sales -- we love a good deal. And I don't think any retailer learned that lesson harder than J.C. Penney (NYSE:JCP) did. Do you remember back in 2012 when the flailing retailer hired Apple's chief marketing officer as their CEO, Ron Johnson?
Brokamp: I remember that part, yes.
Southwick: And then do you remember Ron Johnson's great idea?
Brokamp: No. Was it a club or that was Sears?
Southwick: Storytime. At the time, J. C. Penney, like many retailers, would artificially inflate their prices and then knock them down. They were called fake prices for items. [They would be happy to sell] a t-shirt at $10, so they price it at $20 and then say it's 50% off. Less than 1% of J. C. Penney's revenues came from items bought at full price. And, by contrast, nearly three-quarters of the merchandise sold by the department store chain was discounted by at least 50%, so they really relied on this fake pricing to bring people in. Coupons, big sales, and flash sales which also plays on urgency and scarcity.
The new CEO, Ron, from Apple comes in and he's like, "Let's just stop playing this game, people. If a t-shirt says it's originally $14 but we want to sell it for $6, let's just price it at $7. Let's offer everyday low prices." They called it "fair and square." If you remember, the logo redesign was like a square. I think he thought consumers would appreciate it and be like, "That's where I go to get solid, good deals."
Do you think it worked out, Bro?
Brokamp: I don't think it did.
Southwick: It did not work out. Sales plummeted, and for a few reasons. One of those is price anchoring, and price anchoring is very similar to the decoy effect in that we don't know how much something is worth unless we have context. So, if you price an item as high -- higher than it actually is -- you anchor to that and you think, "Oh, well this is how much it's really worth. I'm getting such a great deal."
Then there is also a lack of urgency. This is another reason why marketing experts said it failed, is that there's no hurry to get into J.C. Penney for a sale to get a good deal. Your coupon isn't going to expire. If you can go to J.C. Penney whenever to get a t-shirt, you're never going to go to J.C. Penney.
As Ron Johnson later admitted, he said coupons were a drug that really drove traffic. He's not actually that wrong about it being some sort of chemical reaction in our head to coupons. Scientists believe that our frenzied reactions to sales is the result of our hunter-gatherer past and the need to hoard items while we can. If there's berries out on the bush, we are going to get all the berries we can off the bush. If there are T-shirts on sale at J.C. Penney, we've got to get some for us. Sales also play into the pleasure principle, which says that humans would rather seek pleasure and avoid pain, and getting a great deal is pleasure. Missing out is pain.
But wait! There's more! Let's talk a bit about pricing. This is like something that everyone knows. The idea that you price something as $0.99 or $0.97 rather than bump it up to what the whole number would be. It's called charm pricing. We might think we would never fall for a stupid, such obvious trick, but studies show that we absolutely fall for it all the time.
Also, sometimes stores will leave the dollar sign off so you won't think of this as money. This is something I see at restaurants. If you look on a menu at what the chicken is, it will say 12.00dollars. It won't have a dollar sign. I don't know if that really works. Also, people are more likely to buy stuff if they can easily do the math on the discount. For example, if something was $10 marked down to $8, we're more likely to buy that than if it's $10 marked down to $7.97, because our brain stops wanting to do the math.
So, it would be like, "Ugh, math." There is a caveat for charm pricing, and that is if you are selling luxury items. If you're selling a luxury item and you're pricing it at $399, that's going to make people think, "Oh, this has been discounted?" Maybe it's a little cheaper than just pricing it at like $400.
There's other ways that math will trip us up when it comes to pricing. People prefer to get 50% more of the same product than to see a 33% decrease in price, which is equal. Also, people like it better when you give them a 25% discount on top of a 20% discount instead of just a single 45% discount. I noticed that on Amazon the other day. It said like original price. Then it said discounted price. Then it said sale price. And then below it, it even did the math for me to see how much total I was saving. They were trying to get me on all points, there. Those are a few ways that marketers use pricing and sales to get us.
Engdahl: Restaurants don't even often put the decimal anymore. It's just like seven, or nine. Well, no. It's more like 17 or 19.
Southwick: Yes, it's got to be a nice restaurant. Like you're not going to go to a Potbelly and see a $7 sandwich.
Alison Southwick has no position in any of the stocks mentioned. Robert Brokamp, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.