Cheap (17 page)

Given this assiduous attention to value, Naylor’s opinion of outlets is worth noting: She uses them, but sparingly. She prefers department stores, which she said generally carry better quality merchandise at prices that are frequently lower than outlet levels. Apparently this view differed from that of the half-dozen friendly British Columbians sitting cross-legged on the walkway, comparing their purchases. One of these, a lively blonde with the robust look of a field hockey midfielder, proffered for our inspection a hooded sweatshirt of the sort commonly sported in police lineups. “This would cost at least $75 at home,” she said. “I got it for $45.95.” The “sunk” costs of airfare, hotel, restaurant meals, and cabs apparently did not diminish the thrill. We bid the Canadians happy hunting and window-shopped our way down the long row of storefronts—Crabtree and Evelyn, Journeys, and Samsonite. We detoured at Naylor’s suggestion to have a look inside Crescent Jewelers, part of a West Coast chain that occupied a spacious corner across the mall from a K. B. Toy Outlet. (This placement seemed strategic. Harried dads could haggle over Mother’s Day earrings at Crescent while across the way their kids haggled over Hannah Montana dolls and Lightning McQueen remote-control vehicles.)

Naylor’s interest in discount jewelry stems in part from the work of one of her graduate students; she had recently completed a study of the jewelry department of J. C. Penney, the no-frills department store chain where Sam Walton got his start. The student concluded that Penney’s and other discount jewelers lure customers with drastic reductions off the manufacturer’s suggested retail prices, but the manufacturer’s suggested price is not even intended to reflect the real price. More accurately, Naylor said, it is a mythical price, a
reference price
with which to manipulate customers’ willingness to buy. She was almost certain that Crescent would offer some vivid examples.

Crescent was as dimly lit as the casino had been that morning, and spookily devoid of customers. A matronly “associate” with the helpful look of an elementary school librarian greeted us the moment we crossed the threshold, and we asked her to show us the store’s best-selling item. She unlocked a glass case displaying “circle of life” pendants; dainty rounds of white gold or other precious metals encrusted with diamonds. She reached in, pulled out a pendant, and turned it over to reveal the manufacturer’s suggested retail price: $3,329. She quickly assured us that this was not the Crescent price. What was the Crescent price? She smiled. It was $832, one-quarter of the original price. This seemed an astonishing discount. But was it worth $3,329 or, for that matter, $832? The embedded diamonds seemed to be of industrial quality, tiny specks that barely twinkled. The 14-carat white gold setting had the look of stamped tin. The clerk pulled a calculator out from behind the counter. “I can get you a better price,” she said, “if you are willing to buy today.” We asked who designed the pendant and where it was made. The clerk admitted cheerily to having not a clue and called over the manager, a man at least two decades her junior who looked less like a jeweler than a counterman at Johnny Rocket. The manager didn’t know who designed the pendant or where it was made, but he did express some certainty that the diamonds “probably come from someplace in Africa.” He assured us that if we truly desired this item, he would give us the “best possible price.” Just how good a price we never learned because our desire was less than true. A quick check on the Internet a few days later revealed that the diamonds in the circle of life were in fact just one step north of industrial grade, and what appeared to be identical pendants were selling on eBay for prices ranging upward of $299.

Discounters like Crescent succeed by offering the perception of value using two signals: one, being situated in an outlet mall associated with so-called premium brands, and two, setting very high reference prices. Had we wanted the pendant but were uncertain of its value, the $3,329 reference price would almost certainly have swayed us, regardless of whether we knew it to be inflated. Most of us are suckers for this “high/ low retailing,” particularly when we are shopping for what we think of as luxury goods: leather gloves and wallets, silk jackets and ties, linen shirts, high-end stereo equipment, and designer anything. A designer label can make us believe that a flimsy T-shirt is worth the $150 manufacturer’s suggested price (MSP) or at least close enough to it to make it a steal at $25. Rummaging through a pile of boxy, ill-fitting cashmere sweaters reliably discounted to $75.99 at basement stores each holiday season, we suspend disbelief that the $250 MSP might actually mean something.

Donald Lichtenstein, a professor of marketing at the University of Colorado, has devoted much of his career to the link between cost and value. Lichtenstein is known among his colleagues as a fastidious and thrifty shopper, and his basement is stacked with entire pallets of discounted running shoes, pasta sauce, and sports drinks. A dedicated marathon runner, he is confident that he knows the true value of these things and is therefore resistant if not immune to high/low pricing come-ons. But he is leery of buying less familiar products at a deep discount. Scams, he said, are ubiquitous and nearly unavoidable.

“The biggest misconception is that consumers believe that if something is not true, the store is somehow not allowed to say it,” he said. “Whatever the legal considerations, in reality the whole consumer protection thing is very limited. You have to be your own policeman. The variance in price is enormous. You have to check prices online or elsewhere before you shop. But consumers tend not to check prices. That’s a huge mistake. When it comes to prices, background knowledge is absolutely critical.”

Most of us think we know a lot about prices, and we do. We know the price of things we buy every week: gas, soft drinks, lunch at our favorite sandwich shop. We know what it costs to ride the subway, the price of the Sunday paper, and the cost of the cup of coffee that goes with it. Things we pay for less frequently—furniture, rugs, jewelry, mattresses, computers, digital cameras, used cars—are things we tend to know less about, including price. Kent Monroe, a pricing expert and professor of marketing at the University of Illinois, said that some states have laws mandating that retailers sell items at full price for a certain period of time before discounting them, but these laws are rarely enforced. As many of us suspect, sale prices are often full prices dressed up in discount drag.

Monroe served as an expert witness in a particularly egregious case in which a mattress manufacturer sued the (now-defunct) May Department Stores for wildly overstating the reference price of mattresses. The case raged on for three years and was finally settled, but this did little to dissuade mattress retailers from inflating reference prices to increase the apparent value of their wares. The tactic has become so common that department stores typically rotate discount offers through a number of mattress brands so that at least one brand appears to be on sale at any given time. (In reality, no mattress is significantly discounted; rather, the brands not on sale carry inflated prices.) Given that most of us buy mattresses very rarely and have little or no knowledge of or preference for a particular brand, we are likely to purchase whatever brand is on sale, none the wiser that the sale price is actually the real price.

This may seem benign, but from a business perspective, it is not. Monroe and other marketing experts agree that inflated reference prices are a serious problem. Although savvy consumers tend to discount high reference prices, they don’t discount them enough to be unmoved by them. We are more likely to buy a mattress—or any number of items—with a high reference price than an item with a lower, more accurate reference price, regardless of its quality or even our real preferences. And as a result of these very high reference prices, our concept of prices of all kinds remains skewed, biasing our thinking on future purchases. We may actually believe that a $250 mattress should be priced at the original manufacturer’s suggested price of $1,000 or at least $500, making it difficult for an honest broker to sell a $250 mattress tagged as such. We want a $1,000 mattress for our $250, not a $250 one! This leads to a cycle of inflated reference prices, more deception, and more consumer confusion about the meaning of price.

Sleight-of-hand reference pricing is especially common when retailers demand and get unique names for the various models of items they sell, making it all but impossible to compare features across stores or even across brands within a store. In the case of mattresses, selling points such as the number of coils or the thickness of “memoryfoam” are meaningless to consumers and, for that matter, to most salespeople. If we are going to check on quality, we need a number or name by which to compare a given model to others in its category. But when these numbers and names vary from store to store, they are useless as a reference point. As one industry insider told
Consumer Reports,
“It’s difficult to compare mattresses unless you cut them open. The retailers demand exclusivity of the cover and label. They don’t want their product shopped.”

Reference prices and selective discounting direct our everyday buying behavior in ways most of us don’t notice and would never suspect. At the grocery store we are far more likely to buy an item at a reduced price even if the sale price is higher than the regular price at another store. Just seeing the difference between the full and reduced price motivates the purchases. It is as though, rather than
spending
the cost of the product, we’re actually
earning
the savings. Lichtenstein has done surveys of shoppers exiting supermarkets, asking them the prices of various items in their shopping cart. “Usually they burst out laughing because they have no idea how much they’ve spent,” he said. “But they usually do know how much money they’ve saved.” Reference pricing is so powerful, Lichtenstein said, because it seems to confound the consumer paradox of wanting more but wanting to spend less. An inflated price makes a product more desirable and makes the actual price seem low by comparison. So whether or not you were actually looking for that product or can even use it, you now desire it. This phenomenon holds an almost irresistible psychological allure. “No one—not even me—is not influenced by reference prices,” Lichtenstein said. “Once you see them, you can’t get them out of your head.”

 

 

 

FACTORY OUTLETS AND Las Vegas both play into this natural human desire to “beat the house.” And like the house, outlets are nearly impossible to beat, at least consistently. This is doubly true in “premium” luxury outlets where fantasy is a key marketing tool. While luxury is not apparent in these places, the very word instills the impression that it is hovering invisibly over the proceedings like a benevolent fairy godmother waving her magic wand.

Luxury has always been with us, but until recently luxury goods were by definition attainable only by the few. In her riveting book
Deluxe: How Luxury Lost its Luster,
reporter Dana Thomas traces the luxury market back to eighteenth-century France where Marie Antoinette “overran her annual clothing budget of $3.6 million by buying gowns encrusted with sapphires, diamonds, silver and gold . . . ” Clothing designed and made for royalty and its retinue was in those days so fabulous and fragile that packing it for travel was a job in itself. Louis Vuitton, a farmer’s son, walked from his home in the Jura mountains in eastern France to Paris to apprentice himself to a trunk maker, where he learned to build and pack trunks for the world’s most discriminating clientele. Eventually, Vuitton had his own business, for which his son Georges designed the distinctive interlocking
LV
logo, thereby launching the phenomenon of luxury brands.

As related by Thomas, the rise of Louis Vuitton is similar to that of many luxury brands such as Dior (which Vuitton now owns) and Gucci. All of these began as family-owned workshops specializing in one or two items and serving a small and exclusive clientele. This pattern changed in the 1960s when Yves Saint Laurent, a Dior assistant at the time, introduced a lower-priced ready-to-wear line and a selection of fragrances and accessories affordable to a wide range of consumers. “From then on,” Thomas wrote, “luxury was no longer simply about creating the finest things money could buy. It was about making money, a lot of money.”

Coach was at the cutting edge of this trend. Founded in 1941, the company started as a small leather workshop where craftsmen tooled wallets and belts for sale by major retailers. In 1946, Miles Cahn, son of one of the firm’s investors, joined the company fresh out of the army. Cahn didn’t know much about leather goods, but he was a natural businessman. Among his innovations was using leather treated in the manner commonly used in the making of baseball gloves to develop softness and patina with wear. Eventually he bought the company and, at his wife Lillian’s suggestion, began making a variety of women’s handbags to supplement the factory’s low-margin wallet business. Sold under the brand name Coach, the bags were fashioned from sturdy cowhide, the grain and seams of which were deliberately kept visible, a notable improvement on the leather-pasted-over-cardboard technique used by most mass-market manufacturers of the time. Cahn built his bag business into a $20 million company and sold it to the Sara Lee Corporation in 1985.

Cheesecake giant Sara Lee repositioned Coach as “affordable luxury,” an increasingly popular marketing slogan as brands took on a significance that eclipsed the stores selling them. In 2000, Coach broke away from Sara Lee and developed a collection of wallets, purses, and bags in both leather and canvas. These “signature” items were branded with the distinctive
C
logo set in a checkerboard print, and many were hot sellers. The company opened new stores in North America and Asia (the European market was considered too competitive), and outsourced most of its manufacturing to China and other developing countries. Today, Coach is a $2 billion operation. And according to Cahn, most of the company’s profits stem from its seventy-five-plus factory outlet stores.