Sunday, January 29, 2012

Simple Pricing versus Price Discrimination

On a shopping trip yesterday, I had a chance to see JC Penney's new pricing scheme. Here's a picture of one of their displays:


As a big marketing push, JC Penney is doing away with the standard complicated pricing schemes of department stores. The store had no XX% off signs and no hidden promotions, just prices that you would pay at the register. Even stranger, all prices were in whole dollar amounts, making it easy to compute the pre-tax bill before approaching the register. Is this a good idea? It certainly has its appeal, but there are reasons that complicated pricing is the norm.

Coupons, special programs and the varying percentage discount at department stores attract a particularly price-sensitive demographic of consumers. At the same time, consumers who do not respond to price will just grab whatever they want to purchase (no searching for discount racks, hence, less likely to get the deals). From this standpoint, the typical smoke-and-mirrors pricing strategy can be used for price discrimination, a classically profitable strategy that involves charging different groups of consumers different prices.

On the other hand, pricing with smoke and mirrors has costs. Just think of all of the paper and ink wasted on coupons, the resources devoted to devising the next discounting scheme and the administrative costs of implementing the markdowns (repricing racks, making sure everything scans at the register, etc.). Even if you can generate more revenue, maybe the costs of price discrimination are too great. Perhaps this is why JC Penney is going toward simpler pricing.

This discussion of price discrimination costs and benefits neglects to mention hat consumers do not necessarily like to be swindled -- and that may be how smoke and mirrors pricing feels. Alternatively, arithmetic-oriented consumers might love the numerical puzzlers that 30-20-10 pricing affords, or possibly, consumers like the excitement of not knowing the price before paying (who doesn't love a surprise discount?).

In the end, it's possible that JC Penney is just betting that more people want to shop at a store with straightforward pricing, but it is interesting to think about the economic conditions that set the table for such complicated pricing at department stores.

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UPDATE: JC Penney has coupled their in-store pricing with some rather annoying advertising.

2 comments:

  1. In Australia Kmart has just switched to an "everyday low prices" strategy. The argument went that people have become jaded about "Sales". Also shopping in your country sounds like really hard work, sales taxes, tipping, you practically need to carry around a calculator.

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  2. Interesting. I was thinking how much JC Penney felt like Kmart with its new pricing scheme -- I thought they already had "everyday low prices" here.

    Regarding carrying calculators, that would be a good idea, but I think most people just show up to the cash register waiting to be surprised!

    With tipping at a restaurant, heuristics are usually pretty good to get an "appropriate" tip. Personally, I take the first digit and multiply by two, then add whatever I need to add to make it an even dollar amount... e.g., if the bill is $13.90, I tip $2 + 10 cents to make it even... with a uniform distribution over prices, this will average to a little over 15 percent. Others just use a tipping app.

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