Bargain Hunters Beware: A Store's 'Original

Price' Might Not Be After All (Michael

Blanding)
Retailers often compare a "sale" price to the original price. Donald Ngwe says consumers should
be skeptical of those original prices — and so should regulators

Sale! Even the word is enough to send a flutter through the hearts of certain shoppers, who
salivate in anticipation of scoring a discount off a product’s original price. Few consumers
stop to think, however, that the only way they know they are getting a bargain is that the
store tells them so.

What if those “original prices” stores base their discounts on aren’t real?

That’s the question Donald Ngwe asks in his new working paper, Fake Discounts Drive
Real Revenues in Retail. (pdf)

An assistant professor in Harvard Business School’s Marketing Unit, Ngwe stumbled

across possible marketing chicanery almost by accident. He was working on a related
project involving a major US-based clothing and accessories brand (he can’t say which),
when he noticed something odd happening at their outlet stores.

“THEY NEVER EVEN TRIED TO SELL THE PRODUCT AT

THAT PRICE. CONSUMERS COULD NEVER HAVE BOUGHT
THAT PRODUCT AT THAT PRICE EVEN IF THEY TRIED”
Some of the products on display were designed specifically to sell at the outlet stores and
had never appeared on retail shelves. Those products, however, still showed an “original
price” along with the discount—only in those cases, that price was completely made up.

“They never even tried to sell the product at that price,” Ngwe says. “Consumers could
never have bought that product at that price even if they tried.”

As he looked into the issue, he realized that the practice is much more common than
shoppers might realize. “Almost every item on Amazon has a struck-out price, but if you
look at the policy behind that price, it’s incredibly vague,” he says.

Consumers have even brought class-action suits against retailers including JCPenney,
Sears, Macy’s, and Kohl’s for their “fictitious prices,” which are forbidden by the Federal
Trade Commission. Those cases, however, often hinge on the question of whether
consumers would have bought an item anyway, had they known the supposed original
prices were fake—a standard that is hard to prove. Some retailers have successfully argued
in court, in so many words, that consumers see through the ruse and know full well these
prices are just guidelines.

Unrepentant
Perhaps for that reason, some companies have ended up in court several times, showing no
signs of changing the practice. “When a retailer like Kohl’s gets sued over this year after
year, it tells you this is not only common, but it’s persistent,” Ngwe says.
Examining the data from the outlet stores, he realized there was a wealth of information
that could answer whether customers were actually fooled by faux pricing.

In fact, when he compared fake prices to real ones paid by consumers, Ngwe found a clear
pattern—for every $1 increase in the posted “original price” for an item, consumers were
willing to pay, on average, an extra 77 cents for that item. What was more, Ngwe found
that repeat customers who shopped at the store often were least willing to pay more money
based on fake prices, while those who shopped at the store least paid higher average prices
based on those “original” price tags.

“This makes me think that the fake prices are working to mislead the customers who know
the brand the least, and who have the least information about the brand, into making a
decision they would not have made otherwise,” Ngwe says.

In other words, customers aren’t merely using the price as, say, an indicator of high quality,
but really do believe that it once sold for that much, including that in their calculus of how
much to pay.

To confirm that finding, Ngwe set up an experiment in which he showed participants a

handbag with a sale price of $40, along with a “true original price” and a “displayed
original price,” each of which ranged $40 to $90. They were then asked a series of
questions, including whether they thought the bag was high quality, a good deal, and at a
fair price. When the true, original price was higher, consumers rated the bag higher on all
of those questions; when the displayed price was higher than the true price, however, it had
no influence.

That surprised Ngwe. “I expected even if they were given verifiably fake prices, it would
still change people’s evaluation of quality, since customers are used to seeing fake
discounts,” he says. “Contrary to that expectation, the data tells me no.”

Participants did, however, rate the bag higher on one factor—how dishonest the seller was.
Taken together, those findings bolster claims in the lawsuits that consumers are genuinely
deceived by fake original prices, and regulators should consider cracking down on the
practice more aggressively.

“There is an attitude among a few policymakers that consumers are savvy enough anyway,
and that, relative to other forms of deception, fakes prices are somewhat less damaging,”
Ngwe says. “My results show that customers don’t see through the ruse. Even in outlet
stores where they might expect some level of false discounting, they are still very
influenced by these signals.”

Homework needed
Truly savvy customers may still be able to separate fake from real original prices by doing
their homework. Some retailers, for example, stitch different codes into their products
depending on whether they are originally designed for retail or intended straight for the
outlets. More broadly, however, caveat emptor still applies. Consumers should know that
displayed original prices aren’t necessarily valid and do their own independent assessment
of what an item is worth to them.

For retailers, Ngwe’s research shows that fake original prices could be a strategy to increase
sales—but only if regulators don’t crack down harder on the practice. If companies want
to make customers feel like they are getting a deal and still be honest, Ngwe suggests they
use wiggle words such as “compare at” or “value at” before the original price.

“This could be a very useful tool, because it allows them to inform the customer of the
value of a product at the same time that it allows them to price their products
competitively,” he says. “They can have their cake and eat it too.”