The system of fixed prices was first popularized a little more than a cen- tury ago when, in a revolutionary marketing vision, retailer John
Wanamaker decided to attach price tags to every product in his Philadelphia emporium. Until then, and still today in many parts of the world, prices were usually set by bargaining. Most stores were like used-car lots, with salesmen sizing up customers as they entered the store and then haggling to get them to pay the highest possible price.
Wanamaker, a social-minded Presbyterian, wanted to create a more efficient and civil environment. His solution was to establish fixed prices. In the process, he also created the great American pastimes of discounts and sales.
Sometimes it seems like the entire world is on sale. When three- quarters of the products on the mall are discounted, this sets up a cred- ibility question, so much that you no longer pay notice to the stated
“list” or “suggested retail” prices. Right? Wrong.
In a study by marketing professor Joel Urbany and his colleagues, consumers were shown one of several variations of a supposed newspa- per advertisement for the same RCA nineteen-inch television.15In all the ads, the TV was offered at a sale price of $319. The ads people saw differed, however, in what was given as the list price of the television.
It was either $359, $419, a ridiculous $799, or, in some cases, no list price was indicated.
Urbany wasn’t too surprised to find that buyers who were shown a plausible list price—$359 or $419—thought the televisions were a bet- ter value than people shown no list price. Or that the $419 retail price made the set even more attractive than the $359 price. This simply con- firmed what contrast theory has said all along.
The unexpected finding was how far this rule could be pushed.
People who saw the obviously inflated $799 list price were the most willing buyers of all. Consumers weren’t exactly fooled by the price.
In fact, those who read the $799 ad were considerably more likely to agree with the statement that “I do not believe that the amount of this advertised reduction is a truthful claim” than those shown the other retail prices for the set. But never mind. Compared with those read- ing the more reasonable ads, consumers presented with the inflated list price of $799:
• Estimated the price of the TV would be higher at other stores (the $799 group estimated an average market price of $449, com- pared with estimates of $389 from the $419 group and $363 from the $359 group)
• Believed the discounted price ($319) they were getting was a bet- ter value
• Were (in a computerized shopping simulation) less likely to take the trouble to telephone other stores for comparison prices
• Were more likely to go straight to the advertised store and buy the set
This study shows that a high reference price not only makes a dealer’s discount look more attractive, but even when people are skep- tical about the suggested reference price they may remain more will- ing consumers. Naturally, there are limits to how far discount seekers can be manipulated. There’s a point where consumers’ suspicions make them ignore marketers’ supposed discounts. As Urbany found, however, it takes longer to reach this point than you might think. This is especially true for products you purchase infrequently or whose quality is difficult to gauge. Don’t overestimate your ability to know where to draw the line.
A variation on this rule concerns the sequence with which you pre- sent different-priced items. Say you want to sell customers a $1 pen.
Studies show that they’ll be more likely to buy the pen if you show sev- eral higher-priced pens first; and they’ll be less likely to buy the $1 pen if you show it before you show the higher-priced ones.16Salespeople frequently apply this order effect through a tactic known as top-down selling. Catalogs, for example, may display similar products from most to least expensive. Or, in a literal top-down maneuver, stores may dis- play a more expensive product at eye level and then place a similar item that is on sale just below it.
It should be noted that Wanamaker’s system of fixed prices has not been without problems for retailers. The fact is that any set price is arbitrary. Once attached to the product, however, it’s static. As a result, the going rate may not reflect what a consumer who walks into the store is willing to pay. The price tag on a Compaq computer may remain exactly the same while the company’s stock bounces up and down by the second. The fixed-price system can be costly for retailers: some enthusiastic buyers would be willing to pay more than the number on the price tag; other reluctant customers might be willing to buy at a lower price but won’t pay the list price. “Hence,” as one business writer observed, “the great challenge of modern retail: how to discount to the cheapskates without giving a free ride to the spendthrifts.”17