Posts Tagged jc penney’s

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.

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.

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