My name’s Mark, but I’m surprised my parents didn’t call me Markdown. Bargains have loomed large throughout my life. Growing up in London, I remember my mother’s coupon stash. It was stored in an old Turkish delight box, clear plastic and brittle, that sat on the kitchen counter, just level with a child’s eyes. Always stuffed with ripped-out coupons, their ragged edges meant that the lid could never quite close; the box gave off a sugary whiff of rosewater that made deals, quite literally, delicious. My mother is from Scotland; were bargain-hunting an Olympic sport, her countrymen would win gold, silver, and bronze (and probably melt them down for their value). Tartan tightfistedness is the butt of constant British jokes. Insulating windows with double panes is a booming business in Scotland, they say, because it stops the children from hearing the ice cream truck when it comes around.
In my mother’s case, the determination to root out price adjustments is arguably her favorite hobby. She regularly returns items so she can, instead, rebuy them on sale. The staff at the refund counter at Marks & Spencer, the British department store, greet her by name with the warmth of an old friend. That same urge for a deal first emerged in me when I was a teenager, trawling for music in local record stores (RIP, HMV). I would drive from suburb to suburb on a single-minded search: to find the rare new releases that had been marked down to spike their chart placements. Nothing was as thrilling on a Saturday afternoon as finding a 7-inch single, half price at 99p. The fact that I’d spent more on gas to get to the store than I’d saved on The Cars didn’t ever cross my mind.
Sales kept me solvent throughout university, when I was shipped in as a temp to staff the biannual extravaganzas at the tony British department store Harrods. It was a stressful gig, mostly because then-owner Mohamed Al-Fayed would prowl the shop floor sniffing out infractions of the staff policy (sitting, removal of jackets, or talking to colleagues) and firing miscreants on the spot. I kept my mouth shut, and my job, through several Januarys and Julys.
Soon after college, I moved to New York City, where I’ve spent the majority of my adult life. After arriving, I passed most Saturdays ambling around the aisles of Century 21, the discount megastore housed in an old bank just a few feet from what’s now Ground Zero. I devised a system to sift through the haphazard racks of designer bargains (hint: Buy anything you see and like in every size, take that haul home, and just return the rejects). If I wasn’t scoring deals at Century 21, I was lurking in the Strand bookstore. It’s had a spiffy makeover since, but in the 1990s the Strand was still a dark, dusty place that smelled of old things, both books and New Yorkers. The racks in the basement were its treasure trove: full of publishers’ review copies, illicitly offloaded by critics. I could buy brand-new hardcovers at half price.
Yet it was ducking into the boutique branch of Bloomingdale’s in New York’s Soho recently that made me professionally curious about all things cut-price. The store is just minutes from my apartment, and I wanted to buy some deck shoes. I was ready to snap up a snazzy pair in white when the perky sales assistant wandered over to chat. Unprompted, when I asked the price, she offered a spot out-of-towners’ discount. Some of the chain’s stores slash 10 percent off for tourists, she told me. Thank goodness I’ve held on to the occasional plummy British vowel. It was a gleeful moment, an unexpected deal that clinched the sale. The thrill was ruined a week later when I found the same pair of deck shoes nearby downtown at one of those stores where the sign in the window screams: CRAZY SALE—ALL SHOES 50% OFF. Just seven days later, at this new, just-started blowout sale, they were half price. Ten percent seemed like an insult. I kicked myself—with those shoes. But I still bought a pair in another color because the deal was too good to resist.
It was a landmark moment. My experience with those shoes left me wrong-footed. Clearly, bargains were now no longer restricted to niche stores, clearance periods, or grubby basements. Buying without a discount almost felt foolish, rather than fair. Frankly, I wondered, why would anyone ever pay full price again?
Just Deal with It
I started to notice deals everywhere. The nagging impulse to search for a code before checking out online. The stamping of a coffee card—where ten espressos will trigger a free drink—is like 10 percent off. Sneaking out of work a little early, or arriving a little late, because of a special one-day sale. Browsing at a brick-and-mortar store for a new TV before bettering the price with a dot-com deal. Shrugging at a50% OFF sign, unimpressed, and instead waiting for that discount to tumble to 70 percent. Groupon, coupon-cutting, or asking, ever so gently, “Is that the best you can do?” Bargain hunting was inescapable and exciting, at least to my Scottish side.
In some cases, the spread of sales seemed sensible. Coffee shops co-opted the idea of a bar’s happy hour to jolt sales in the slower afternoon period, as Manhattan’s ’wichcraft did by selling drinks 50 percent off between 3 and 6 p.m. on weekdays. Few would criticize the restaurant in LA that offered a 5 percent discount to every diner who was willing to check his or her cell phone at the door, either. As the economy has slowed, most canny Americans sloughed off any shame over coupons; in a survey, more than a quarter admitted that they’d even used them on a date. So pervasive has the small slip of paper’s—or chit’s—pop culture profile become that underemployed megamom Kate Gosselin’s next gig after her reality show imploded was blogging for a couponing website as its celebrity spokesperson (though her abrasiveness quickly cost her that job, too). Think of how Geico built its entire brand not on a Cockney-accented gecko but on a simple slogan: “Save 15 percent or less in fifteen minutes.” Similarly, rival Progressive’s perky spokesbot Flo long seemed unable to open her mouth without chirping “Discount!”*
The symptoms of such salesmania continued to spread. Take, for example, retailers starting markdowns the day before Black Friday, coining a new name for Thanksgiving—that’s Gray Thursday, please. Even this wasn’t always enough, as I heard stories of families delaying Christmas expressly to snap up gifts more cheaply. More than just a response to straitened economic times, there was a palpable pride in cut-price shopping that overrode any stiffened sense of tradition. One woman told me, all aglow, that she weighted boxes with sugar, then wrapped them, stunt-present style, until the real treats arrived a day later and 50 percent off. Another single mom opted to leave her young sons a note from Santa, apologizing that he couldn’t make it to their house the night before and saying he’d asked her to take them shopping on his behalf. These women may have gloated over such reindeer games, but their clique has been rapidly expanding: December 26 is trending to be the third-biggest selling day each year, after Black Friday and the Saturday before Christmas.
Other statistics I unearthed were even more staggering. The number of Americans who would purchase clothes only on sale went up from 16 to 23 percent in the four years after 2007; that’s nearly a quarter of the population. Even 1 percenters weren’t immune to the call of the sale; among Americans earning $150,000 or more, that number doubled, from 10 to 20 percent.* In 2006, only one in three shoppers found a “70% OFF” sign credible; six years later, almost two thirds of people would buy in and believe such a markdown. Most tellingly, though, I found that retailers sold 40 to 45 percent of their inventory at some kind of promotional price in 2011. Ten years earlier, they had sold just 15 to 20 percent of stock that way. In just a decade, sales of sales more than doubled.
No wonder businesses have started to rely on bargains to spoofish—sometimes even dangerous—extremes. It’s become a frantic game of markdown one-upmanship. Was it kosher for New Jersey’s Seton Hall University to offer top-GPA types up to two-thirds off annual tuition, a discount of around $21,000?
When an Ohio animal shelter offered an 85 percent reduction on its cat adoption fee, there was only one catch: It clawed out a discount from $70 per cat to $20 for two cats with the proviso that its price cut applied only to the obese kitties, like 23-pound Zeke.
Black Friday might as well refer to the bruises that result from the scrum-like scrambles that have defined it in recent times. In one year alone, there was pepper spraying, Tasering, and shooting of customers, none of it by the police. One of the fiercest examples of shopper-on- shopper violence was, ironically, between a herd of mothers and daughters hopped-up on marked-down yoga gear.
What does it all mean, other than suggesting that gridiron gear is a suitable shopping outfit during sale time? This accelerating avalanche of bargains marks a seismic shift in the way we shop. It has fundamentally changed our relationship with stores. Markdowns have become a daily concept, no longer the exception but the norm. Full price is a quaint, retro notion rapidly losing any meaning. Living in Let’s Make a Deal, people don’t only want a deep discount, they expect it, and won’t settle for anything less. There’s never been a better time to be a buyer: empowered, informed, entitled. We won’t return to a meek acceptance of retail’s rules again. Wielding the pricing gun for the first time, shoppers call the shots. So what caused this pandemic, a bargain fever that turned ordinary Americans into the mall-walking dead?
Contemporary life resembles a 3-D SkyMall catalog. This is the era of TV shows built entirely around our acquisition of too much stuff:The Price Is Right is a ratings footnote compared to bona fide prime time hits like Hoarders or Storage Wars. While one chronicles the dark side of our compulsion to acquire, the other turns it into sport. The same more-is-more impulse drives supersizing, whether foot-long hot dogs or Big Gulp drinks. It doesn’t affect just fast food, but fast fashion, too, which birthed the phenomenon of hauling: teen girls binge-buying cheap clothing at the mall, then rushing home to upload YouTube clips showcasing their bulimic spree. They’re more interested in the tally than the taille. America may have always celebrated conspicuous consumption, but something is different now. Choice has morphed into excess.
Indeed, products are proliferating at Star Trek speed. Supermarkets after World War II stocked an average of 3,750 items; by the end of the twentieth century that number had increased more than tenfold, to 45,000. In 1994, the total of UPCs for consumer products—in other words, things that could be sold at a store by scanning them—was just over five hundred thousand. Less than ten years later, it had reached almost seven hundred thousand. In 1980, there were six major blue jean brands in America; thirty years on, that number was eight hundred and climbing. We have enough excess possessions to birth not just a TV show about self-storage but also a booming industry. In 2012, there were 2.3 billion square feet of storage space in this country, and more added since. One in ten US households was renting some kind of unit, an increase of 65 percent since the late 1990s. Retail space increased at an average net rate of 4 percent over the same period, regardless of economic downturns or surges.
None of this would be problematic but for a sticky detail. The American population’s average annual growth rate since 1980 has hovered around 1 percent; in 2011, it dropped to its lowest ever to 0.7 percent. These two contradictory forces create an era of oversupply and under-demand. This is the reason another fitting name for bargain fever could be Too Much Stuff Syndrome.*
In a new retail equation, ultimate power has shifted to the shopper for the first time. The tsunami of bargains presages the beginning of a third phase in retail—call it shopping 3.0. The first, spanning the century after the Industrial Revolution, foregrounded producer power: demand outstripped supply while distribution was complex and pricey. Shoppers outside major cities like New York or Chicago were hostage to manufacturers, and weathered both take-it-or-leave-it pricing and less choice.
The second phase, lasting approximately forty years, emerged from the ashes of World War II. Eisenhower’s interstate highways made transport easier while suburbs boomed. It was the retailers’ turn to dominate, and they did, a golden era of marketing when a great ad could turn any new product into a household name. Take Alka-Seltzer, which plink-plonk fizzed its way into every bathroom cabinet in the country. In the TV show Bewitched, what other job could shorthand how debonair and modern a man Darrin was but advertising executive? The shopping center was a cultural bellweather, a place of both yearning and spending, from concerts by Tiffany to seniors on walking loops, and bored mall rats. There was a chummy familiarity, almost a trust, between sellers and shoppers. Sure, there were deals, but their quantity was restricted; the bargains were limited to the minimum needed to keep ordinary Americans as placid as lotus-eaters. We took what we were given, and we were grateful for it.
The turn of the millennium marked the start of phase three, shopping 3.0. This new chapter has been Sadie Hawkins Day at the mall, a role reversal where overstocked stores must wait anxiously on the edge of the retail dance floor as potential customers prowl the room. Discounts have become the default, powered by the new (old) mantra, “Is that the best you can do?” Shoppers banding together to collude and wheedle a bulk deal from a seller, literally leveraging buying power, is the basis of the millennial phenomenon, Groupon.
The Internet has helped torpedo the power of mass advertising, so beloved a tactic in that second phase. It has also made prices transparent, via comparison engines that act much like warp-speed digital personal shoppers, and birthed businesses such as eBay. Such operations taught ordinary Americans that price tickets were not put there by the great printer in the sky, and reminded them of the thrill of negotiating a bargain. As a plus for newbies, online buyers can haggle remotely, via automation, and therefore embarrassment free, avoiding the markdown stare-down. Sellers—whether a hotel, a shoe shop, or a supermarket—are forced to slash numbers to stand out from the widening roster of competitors that crop up with each new Google search.
Under this new paradigm, shopping has become a daily Dutch auction, where retailers must drop their prices until a picky shopper raises his or her paddle and opens their wallet. Equal parts empowered and economically pinched, consumers can now demand markdowns, more like retail hackers than buyers. One business, Shopper Gauge, has even emerged to help stores better cater to such finicky customers. It uses security footage as the basis of a new kind of analysis to track whether someone who lingered in front of a given item ever bothered to buy it. The system is programmed to discount false positives from staff in uniform, for example, and bundle a group shuffling together as a family outing, as it flags those who linger for eight seconds or more (a mark of engagement) and then cross-references such numbers with how many sales of the browsed item were registered during that hour. If fifteen shoppers lingered for eight seconds, but only four sales were made, the company will flag that disparity so that adjustments can be made; boosting the bargain from 25 percent to 30 percent, for example. In other words, Shopper Gauge instructs shops to kowtow to consumers rather than the other way around. It’s soft-soaping, not hard-selling.
Distributors were the decision makers in retail’s first era, while shops held sway in phase two. In shopping 3.0 the power is in the hands of buyers for the first time. Who can resist squeezing, ever so gently?
The Bargain Bible
Bargains are the highest-profile evidence of the paradigm shift that’s taken place in retail since the turn of the twentieth century. Those “50% OFF” stickers are proof that there’s never been a better time to be a shopper, and there’s no longer any reason to ever pay full price. This book will explore why deal hunting has gone from being a sign of indigence to one of intelligence, and explain how seeking out discounts became a badge of pride rather than a scarlet letter of shame. Bargain Fever will help you earn an A in Bargains 101, whether dipping into the crazy world of coupon addicts or finding out how large a spot discount Pottery Barn might offer you just for asking nicely (15 percent, in fact).
To start our journey, it’s vital to understand two questions: Why do bargains work so effectively on even the savviest shoppers? And, as stores see their power ebbing, what tactics will they use to try to retain a modicum of control? The answer to both begins with a trip to a mall in upstate New York one Thursday night in late November. It’s freezing, so don’t forget your gloves.
Your Brain on Sales
How an All-Natural “Buyagra” Makes Deals Irresistible, the Power of Price Consultants, and the Real Reason Target’s Logo Is Red
In less than two hours, shopping’s newest bargain rubicon will be crossed for the first time: Black Midnight. Stores like the Target in Clifton Park will open as early as possible on Friday after Thanksgiving, 2011, to offer a marathon of markdowns. Bundled up against the cold, a crowd of three hundred or more lingers patiently in line, making it seem more like a busy summer Saturday than the middle of a chilly winter night. There’s a buzz in the air, and crumpled circulars are passed around like contraband: 46-inch TVs for $298 (a $250 saving), $40 gift cards with every iPod touch, and a Nikon camera for less than half price at $99.
But these Spenderellas have no idea why they’re really here, heeding the siren call of a sale rather than sleeping off the turkey torpor like the rest of us. Each shopper was stirred by an irrational, but instinctive, response: the surge of a chemical in their brains that is nature’s bargain hormone, buyagra. Why else would anyone be standing in the freezing cold outside a suburban mall at 10 p.m. on Thanksgiving night?
Peggy Castle, a stout brunette, is first in line. She is typical of these extreme deal hunters, a veteran of door busting who arrived just after 5 p.m. Sitting in a lawn chair, swaddled in a parka, her only concession to fashion is a jaunty Coach headband. “Last year, I slept in Walmart all night to get a thirty-two-inch TV for my son,” she says. “I brought a tent and they were kind enough to let us in so I slept in Home and Garden.” Her voice is sandpaperier than Marge Simpson’s. “Nothin’ would have stopped me, I’m not even kiddin’ ya. Nothin’.” This year’s mission: a $157 netbook computer for her soon-to-be son-in-law. Another bargaineer waiting in line with us held her Thanksgiving dinner a day early, on Wednesday, so she could focus completely on shopping tonight. Target’s staffers, handing out treasure map–like guides, have stage whispered the quantities of loss-leading deals like those 46-inch TVs to calm the jittery crowd. But just in case that backfires, a smattering of security is dotted around the store’s perimeter. Most are off-duty cops on the store’s payroll, and their presence is vital to prevent the stampedes that have become as traditional as turkey and family rows during the holiday.
There’s a similar scene just one hundred yards or so across the parking lot, where another cadre of midnighters clusters outside of Kohl’s. This is a smaller crowd (just seventy-five or so) and mostly moms in the middle (-age, -class, -income), lured by one of the five hundred early bird specials touted on its circular. The mood here is more infectious than anxious, and the women trade tips as they chat. There’s a festive edge to their sense of shopping clout. “They hide things around the store, you know,” confides soccer mom–like Kelly Ballard. “We know that from last year. A GPS on sale? It might be tucked into the kids clothing.” Another Spenderella tallies her potential haul like a mathlete with a Mastercard, stacking different discounts together for maximum impact: charge card, VIP card, Kohl’s cashback dollars (“It’s fifteen dollars Kohl’s cash for every fifty dollars you spend, instead of just ten dollars”). “The prices are cheaper than the Internet,” she raves.
This crowd needs more entertaining than policing, so Kohl’s has hired a two-story bus decked out as a makeshift cupcakery. Neon lights humming, it’s completely empty. Kelly Ballard scoffs. “You drink coffee, you gotta pee eventually, and where you gonna?” She shrugs.
Such singlemindedness is a tip-off to her mental state, flooded with bargain-seeking hormones. She and her fellow shoppers are hopped up on discounts, brains flushed much the way they would be after a hit of cocaine or crystal meth. They’re suffering true bargain fever. This febrile state of mind is sparked by a well-known but misunderstood chemical: dopamine. This “buyagra” triggers every time a great deal appears, hardwiring us to respond to bargains. In fact, for a surprisingly large number of Americans, dopamine is, quite literally, impossible to resist.
Blame It on the Brain
The brain is the Kim Kardashian of the body: high-profile and high-maintenance, with a true purpose that we still can’t quite understand. What’s certain, though, is how it evolved: much like a pearl, with layers accreting over time around a grain of sand. In a human brain, the equivalent to that grain of sand, buried deep at its center, is the striatum. A region that governs basic functions such as sex, food, and survival, it’s also one of the areas most susceptible to the effects of dopamine.
Dopamine is a neurotransmitter, a chemical that acts like an e-mail message sending instructions between various areas of the brain. For every message marked URGENT, the striatum is a prime target. Dopamine is a compound so basic that it’s found in the brains of snails, reptiles, and fish. Even honeybees rely on the buzz of a dopamine doppelganger as a neurotransmitter. For a long time scientists assumed that dopamine was a “hedonic,” a kind of feel-good juice released whenever we detect something pleasant. But about twenty years ago, science realized it had misunderstood dopamine’s true mission almost entirely. The chemical was far more crucial to our brain’s operations than anyone had realized. Its role was also far more complicated.
Wolfram Schultz led this discovery. Now a scientist at the University of Cambridge in England, Schultz is kind eyed and square jawed, and speaks softly with a crisp German lilt. In his study, Schultz monitored the brain activity of monkeys while a simple sequence was carried out. A light was flashed, a few seconds passed, then some apple juice was squirted into the monkey’s mouth. During this experiment, Schultz chanced on two surprising facts about dopamine. First, that once a monkey had learned the sequence, this chemical surged in the brain when the light flashed, rather than when the juice was squirted. In other words, the monkey was actually responding to the anticipation rather than the reward.
More intriguing, after repeating the experiments for a while, Schultz was surprised to discover that the best way to maximize dopamine in the monkey’s brain was with a shock squirt of juice, without the light as a warning. Dopamine, he concluded, wasn’t feel-good juice after all. Instead, it flagged unexpected bonuses—whenever we’re happily caught off guard, say, or something turns out better than planned.
The findings were bolstered by a similar experiment involving rats, in which a rat was dropped for several days into a maze containing Fruit Loops hidden under a toy. Every time the experiment was run, the rat’s behavior remained unchanged; he’d chow down on the cereal with gusto. What happens in his brain, though, is very different. On day one, discovering that unexpected food for the first time, dopamine spritzes liberally, celebrating and marking the bonus. Five days later, that same hormone is all but absent; the rat takes the cereal for granted. In other words, dopamine is the chemical equivalent of an aha moment (Pax, Oprah Winfrey). Order a slice of chocolate cake in a restaurant and there’ll be little dopamine released in your brain. But if that café spontaneously produces a slice complete with a candle on your birthday, dopamine neurons will spurt.*
The something-for-nothing setup of a bargain on Black Midnight affects our brain in a similar way. Anything that costs less than might be expected activates that flow of dopamine. Indeed, it’s akin to cocaine’s euphoria, which is also dopamine driven; those narcotics trick the brain into releasing it roughly fifteen times faster than usual. This chemical—which Schultz calls “the best reward system the brain has”—not only spotlights an unexpected pleasure but motivates us to seek out that feel-good moment again.
Imagine a total stranger walks up to you on the street and hands you a thousand-dollar check that can be cashed at any bank. The first time you go to your local branch and exchange it for greenbacks, dopamine will deluge your striatum. Now let’s say Mr. Moneybags keeps popping up across town, never in the same place twice but always with that thousand-dollar check. On his one hundredth appearance, as he hands you that check, the brain’s reaction has modulated, much like the rat in the maze or the juiced-up monkeys. The surprise isn’t the money itself but the man with the check. Dopamine’s response migrates from simple payoff (cashing the check) to anticipation (the sight of the generous stranger). Put another way, if you found a bargain at a store last Thanksgiving, your brain will be bubbling with that wallet-opening hormone before midnight even strikes. As long as you chance on a great deal again (as Target, Kohl’s, and co all but guarantee), the cycle will keep repeating. This is another reason, in addition to oversupply, that the past decade has seen an acceleration of discounts. It now takes deeper and more frequent markdowns to achieve the same retail high.
If dopamine is triggered so reliably at the sight of a shopping steal, how does anyone manage to emerge from a store without snapping up every bargain on offer? Thankfully, there’s a trip wire in our brain that takes the form of a chemical tussle between three distinct regions. The nucleus accumbens, the insula, and the dorsolateral prefrontal cortex (call it the DLPFC—all the experts do) all react to that tsunami of dopamine. Together, they decide whether or not we should act on dopamine’s prompting.
The nucleus accumbens and insula are both buried in the center of the brain, close to or part of the striatum. Their location is a tip-off that they were early to evolve, making them likely to play roles in visceral or gut reactions. Both have multiple functions but, broadly speaking, the nucleus accumbens has a teenage-like fondness for immediate gratification, while the insula has a spinster’s readiness to register disgust.
The DLPFC, one of the brain’s outermost layers, is very different; rare in animals, it’s correspondingly challenging and expensive to study. The greater the number of layers in a brain, the more senior an animal’s position in the evolutionary food chain. Only high-level primates such as rhesus monkeys or apes have this region, which is lacking in commoner lab subjects such as rodents. The DLPFC is assumed to be a high-functioning system that weighs the pros and cons in actions. It’s involved in short-term memory, delayed gratification, and all-round calming down. One team of researchers tested this hypothesis by applying magnetic stimulation to various parts of the DLPFC in subjects. They demonstrated that by boosting the left side of this section, the subjects showed an increase in impulsiveness; while strengthening the right side made the volunteers’ caution cast-iron hard (pity the poor patsies in that study who likely now have no problem working out which way is north on the journey home).
One kooky experiment best explains how our brains both weather and process that dopamine deluge. Researchers used an fMRI brain scanner to monitor twenty-six men and women while they were shown eighty products, everything from Godiva chocolates to a Harry Potter box set. Participants could choose to buy any item using monies provided by the researchers. They were shown each product for a few seconds, then a price of between $8 and $80 flashed onto the screen. The researchers explained that these were discount prices, without specifying the actual discount percentage from the retail price (reductions were up to 75 percent). The experiment was intended to examine how the brain assesses pricing, and especially discounts.
Their findings uncovered a distinctive sequence. Take a Harry Potter devotee, going Hogwarts-wild over the sight of a beloved box set. That surprise appearance was an ideal dopamine trigger. At the first surge, the nucleus accumbens flared with excitement; its level of activity in direct relation to how much a subject desired the treat. Then, when a price appeared next to those books, the brain activity shifted to the insula. It’s the brain’s Debby Downer—a stoic processor of chronic pain or disgust (How much is it? Can I afford it?). If the price of the item was lower than expected—Just twenty bucks for all seven books? Wow!—blood then surged to the headmaster-like DLPFC. The DLPFC tallied the pluses and minuses of the splurge. It was this region, researchers suggested, that made the final purchasing decision. If there was too much blood flow to the insula, the volunteers didn’t buy; the brain’s gut reaction had dismissed the product as not a good enough deal. But if there was a surge to either of the other areas, they snapped up the cut-price treats. The absolute price was irrelevant. Each of the three areas, the nucleus accumbens, insula, and DLPFC, activated in proportion to whether the subjects considered an item a good deal or a bad deal. So consistent did that pattern seem to be that the researchers could accurately predict purchasing decisions from the activity observed in these three distinctive regions.*
If every brain were identical, of course, our reaction to that “50% OFF” sign would be equally consistent. So why are some people, like our Black Midnight Spenderellas, more willing to camp out overnight for a good deal than the rest of us? The answer comes down to DNA. In most brains, a dopamine dump is quickly broken down by an enzyme known as COMT. However, a genetic quirk that affects one in four Caucasians renders COMT less effective than it should be. In the brains of the people with this gene mutation, dopamine lingers far longer than nature intended, making them more trigger-happy than normal when bargain hunting. As dopamine spurts like a party popper, the brain has to clean up the chemical streamers. For most of us this happens at power vacuum–like speed, but anyone with this variant of COMT has the equivalent of a hand broom.
Among this group, then, dopamine can short-circuit the DLPFC’s ability to exert control over our actions. Instead, overdosed with the hormone, the brain allows the striatum and, especially, the nucleus accumbens to wrestle primacy away. In shopping terms, that makes those bargains—already a dopamine-producing delight—almost irresistible. As Yale neurobiology professor Amy Arnsten put it, “It’s losing that part of you that says, ‘Do I really need this? Can I afford this? Yes, it’s a good deal but is it a good deal for me?’” Even those with the non-variant COMT enzyme can suffer a similar fate; stress inhibits the DLPFC’s power, too, along with our willingness to defer to its reasoning. This is the reason that stores try to pressure shoppers with time-sensitive deals: each frisson of pressure makes it harder for reason to retain hold. Struggling with hundreds of other sharp-elbowed shoppers, tussling over the same doorbuster deal, makes that low price even harder to resist.* (All the more reason to make a list and check it twice before chancing any pre-Christmas bargains.)
If dopamine is “buyagra,” the chemical and physiological reason that sales are irresistible to the human brain, then dopamine andmoney are as combustible a combination as Burton and Taylor. Certainly, stores rely on such vulnerability every day. But when it comes to sales or bargains, there’s a problem. As we’ve seen, dopamine encodes a learned response. In other words, once Peggy Castle and her fellow Spenderellas discover that Walmart offers the best Black Friday bargains, they’ll remember and return. However, if sales are too frequent and aggressive, that dopamine shock of a sale dissipates. When shoppers expect a price to be lowered, the surprise is gone, along with that wallet-opening feel-good juice. That is, unless you can trick the brain. Tens of millions of research dollars have been funneled into finding out the best way to engineer sales-minded sleights of hand. It’s a last gasp attempt by stores to flex their dwindling control. If you think you can outsmart such retail skullduggery, read on.
It’s Saturday, early summer. You’re close to budget for the month, but a new branch of Best Buy opened up in your town—just as your TV has malfunctioned for the fourth time in four weeks. How handy, then, that the electronics megastore is staging a giant sale on Samsung flat screens with 30 percent off each model: a 32-inch for $499, a 40-inch for $699, and a 46-inch for $899. It’s such a great deal, you couldn’t possibly pass it up. Six hundred ninety-nine dollars later, there’s barely room in the trunk for the giant cardboard box.Sold. Heading back to the mall, you stroll past The Children’s Place, where there’s a sign blaring: ENORMOUS MEMORIAL DAY SALE. It’s a handy reminder; one of your colleagues just had a baby and it would be rude not to buy her a trinket. A triple pack of onesies is reduced from $12.95 to $7.77. Sold. You should really go home for lunch, but you’re curious to check out Panera Bread’s new menu. Apparently, it now sells a lobster roll—way too pricey at $16.99 for a sandwich—but the $6.59 soup-and-salad deal is a bargain. It’s basically like saving ten dollars and the smell of fresh-baked bread is making you even hungrier. Sold. Nordstrom is next door, the department store that bests its rivals on quality and service. Just inside you spot a $110 MICHAEL Michael Kors maxi dress that will be so versatile for the hot months ahead, and the workmanship is top-notch. It would be silly to leave it on the rack. Sold. On your way out of the mall, you walk past the red Target logo. It’s just too cute, that red, black, and white Sale sign with a picture of Bullseye the dog. Just ten minutes to browse, you tell yourself, as the deals are so good. The rack of sunglasses, all just $12.99, aren’t on sale, but you could do with a spare pair to keep in the car. Sold. Driving home toward the freeway, Walmart and Costco are looming. They jog a guilty memory—you should have brought the grocery list on the fridge—so you detour quickly to see if anything catches your eye. Walmart has a twelve-pack of Heinz ketchup for $36.17, and Costco’s bulk order of paper towels is just $19.08. Sold. Total tally from the trip: $891.60, plus gas and sorry-I-splurged gift to defuse your spouse’s fuming after seeing the credit card bill. Call it a round $1,000 that you spent on a day when you didn’t even intend on opening your wallet.
Take heart, though, because none of this was your fault (especially for the one in four with the iffy COMT gene). Each store was using a different discounting trick to trigger the dominoes of dopamine in your brain. It was an episode of Wipeout at the mall, except every obstacle didn’t dunk you, but rather derailed you into spending money. Only in the last two decades has this new retail landscape emerged, its architects members of that booming but shadowy new industry: price consulting. Their jobs wouldn’t exist were it not for the explosion of interest in the field of a renegade academic discipline known as neuroeconomics.
The Bird in the Hand, the Funhouse Mirror, and the Cab in a Rainstorm
Human beings make stupid decisions around money, as the authors of buzzy books like Freakonomics and Predictably Irrational have explained so adroitly. Putting a tax rebate into a savings account instead of using it to pay down high-interest debts is illogical, but commonplace. Why has Deal or No Deal, a game without skill or strategy centered simply on the suspense of watching someone open some boxes, become a global TV megahit, seen everywhere from Albania to Vietnam? Even feeding a one-armed bandit relies on much the same suspension of smarts. It’s all thanks to our irrational relationship with money, a flaw that neuroeconomists have made their mission to understand and exploit.
Three crucial tenets of this field help explain why sale signs are so dopamine boosting. The first is what neuroeconomists call loss aversion, a fancy name for the Bird in the Hand rule. Time and again, experiments have shown that the human brain feels greater pain and anxiety over losing money than excitement at gaining it. In other words, we’d rather stick with what we have than chance even rational risks.
Take a set of volunteers who’ve arrived at a lab one morning to be greeted with a crisp hundred-dollar bill. Each is now one hundred dollars richer, unexpectedly (cue: warming spritz of dopamine). But ask those very same participants to gamble that money on a coin toss a little later—they can win ten dollars on heads, but must surrender ten dollars on tails—and few, if any, will agree. Up the ante to fifteen dollars won and only ten dollars lost and still most resist. Though the worst that gamble can leave them is ninety dollars richer than they were before they walked into the lab, loss aversion is too powerful to overcome.
Safeguarding our pocketbooks in this way is so visceral an impulse that the rational, DLPFC-style brain is overridden by this impulse. One price consultant often runs a spontaneous real-world experiment when addressing a conference or meeting full of sharp-suited execs. He’ll offer such money-juggling titans a choice between receiving a onetime payment of $4,000 or gambling fifty-fifty on receiving $10,000. Logically, the latter is a far better offer, yet every time the overwhelming majority chooses the former. The price consultant will point this out to the throng, pause, and then pose a second conundrum. Fictitious debt forgiven, there’s a fresh challenge: each person can either forfeit $3,500 or gamble fifty-fifty on losing $8,000 or nothing at all. Again, most will choose the latter: the illogical but more loss-averse option. The Bird in the Hand rule is that our pain at foregoing cash is so acute that it overrules the logic of winning it.*
The second key theory of neuroeconomics is the reference point, which acts as a kind of fiscal funhouse mirror warping our perceptions and perspectives around money. An old experiment concerning salaries best illustrates this. Volunteers were offered two similar situations. In one, they could opt to earn $35,000 in an office where every other staffer’s salary was $38,000; in another, their salary would be just $33,000 but their peers would earn only $30,000. It’s a no-brainer to a computer, but to a human brain, this puzzle is agonizing. Eighty-four percent of people, quite rationally, chose the former, since they would be earning more money. Even so, 62 percent said that they would be happier in the latter case—earning less in absolute terms, but more than their peers. The fiscal Funhouse Mirror reminds us that the value of money is surprisingly relative. When we look at numbers, whether salaries or prices, we consider them in context, weighing up fairness or advantage. In bargain terms, it’s the power of the “WAS!/NOW!” sticker.
The third theory of neuroeconomics that helps decode the power of a sale is the idea of transaction utility. Utility is a familiar term in conventional economics, too: It denotes the value of something to an individual. If every slice of pizza costs the same regardless of toppings, picking pepperoni because it’s your favorite indicates it has more utility, or value, to you. But neuroeconomics further unpacks the idea to look at what it calls transaction utility. Think of this as the Cab in a Rainstorm principle. Simply put, the same taxi is more valuable (or at least valued) when it’s stormy than on a sunny day.
Imagine one Saturday at the mall, you’re waiting in line to buy a polo shirt at a store and a passerby confides that Macy’s has the same item but reduced from $25 to $15. Most people would ditch the line and scurry over to the department store to save $10. Later that same day, you’re on line again, this time to buy a seated lawn mower for $525. Another helpful stranger pitches in and says it’s $10 cheaper at Home Depot next door. Few people would bother to make the change this time, though rationally the saving is identical ($10, enough to buy a season’s worth of weed killer). This is the perfect example of transaction utility for a neuroeconomist: the $10 discount has relative, rather than absolute, value. To humans, so deliciously irrational, $10 can be worth more or less depending on the circumstance.
Another classic study that also illustrates this theory tasked volunteers to picture themselves on a hot beach with a friend. This friend was offering to go and fetch a bottle of ice-cold water, but the friend was facing a quandary: two places selling water, both of them a similar, long hike away. One was a swanky five-star resort’s beach bar, the other a ramshackle island hut. Before setting off, the volunteers were asked a question. The friend needed to know the maximum they were prepared to pay for a bottle of H2O, since its price would differ between bars (tough to replicate the experiment today, since we’d just text and ask). At the tony spot, the volunteers would be willing to pay an average price of $2.65; at the grimy hut, they would stump up only $1.50. That difference is completely illogical. Indeed, to a classical economist the idea of paying a varied price is nonsensical. The product was the same (ice-cold bottled water) and would be drunk in the same place (a fictitious lawn chair miles from civilization); in theory, the venue where it was purchased would be irrelevant. Again, a bottle of water isn’t just a bottle of water. Value exists in context, and is far from absolute.
There’s a difference between transaction utility (the Cab in a Rainstorm) and acquisition utility, the term neuroeconomics applies to that more traditional idea of cost, as in the pizza and pepperoni example. Take Mr. Bill Dollar and his wife, Penny. She’s thrilled after spending the day at the mall, since she’s coming home with a beautiful punch bowl. Penny’s giddy with excitement (and dopamine), trilling that the bowl was reduced from $600 to $150. Bill grumblingly reminds her how long it’s been since they hosted any kind of party where it could be used. Both of them are assessing the punch bowl’s value, or utility, but they’re doing so in different ways. Mr. Dollar is focusing on acquisition utility, syncing the price with its usefulness—cost per use, in other words. Mrs. Dollar, on the other hand, is obsessed with how much she’s saved. Driving home, Penny was muttering “Six hundred dollars, six hundred dollars, six hundred dollars.” She’s energized by the fact that the actual price she paid is lower than her reference point. Hers was a good deal, illustrating what’s technically known as positive transaction utility. And whether it’s a price cut for Penny or Fruit Loops cereal for a rat in a maze, positive transaction utility is the term neuroeconomists use for the moment dopamine squirts into the brain.
.99 Problems: The Five Secrets of Price Consulting
Such experiments may be merely intriguing to ordinary Americans, but price consultants have made a career—and many millions—out of them. They leverage our irrational relationship with money to help maximize retailers’ profits, the ultimate antagonists in shopping 3.0. Knowing their tricks, though, it’s easy to spot them every time they’re applied.
For centuries, pricing was simple. Since the advent of accounting ledgers in medieval times, vendors had adhered to a cost-plus pricing model: noting how much it cost to acquire an item, adding on a standard margin, and offering it to the market at that price. This was arithmetic.
Retailers shuffled away from this approach in the 1890s. British economist Alfred Marshall, credited with inventing the supply and demand curve, noted that capitalism wasn’t just about cost or supply but about the customers’ wants and needs. Yet prices didn’t truly detach from cost until American economist Theodore Levitt published his Mad Men–era screed Marketing Myopia several decades later. Levitt’s essential insight was that customers don’t buy ¼-inch drill bits, they buy ¼-inch holes. A company’s job is to solve their customer’s real need, rather than simply sell them something. Such a revelation encouraged retailers to push the margins with the lip-biting optimism of a tax-deducting entrepreneur. This was alchemy.
Price consulting became a career per se in the mid 1980s, thanks to Hermann Simon, a wily ex-professor of economics in Germany. Simon was obsessed with the idea of “willingness to pay.” He and his upstart cohorts wanted to dismantle retail’s old structure and rebuild it without regard to cost-plus pricing. On behalf of a client, they asked themselves three questions, all of them aimed at maximizing a company’s profits: Who is the customer? What do they need? How much are they willing to pay to solve that need? Using their answers, Simon and his colleagues invented value-based pricing, essentially transaction utility in practice. Don’t start with manufacturing costs, Simon said, but with the customer and what they value about a certain product. Today, price-consulting savants break down exactly how much the demand for a good or service yo-yos in sync with its price tag (a concept known as price elasticity of demand), then help businesses adjust accordingly. The brinkmanship is akin to an everyday auction, pushing prices as high as the market will bear. With the excess that characterizes manufacturing today, though, such machinations have become even more complex.
The industry-wide Professional Pricing Society was founded in 1984, but saw the fastest uptick in membership in the first decade of the twenty-first century, from around six hundred people to four thousand or so worldwide. Most of its members specialize in what’s euphemistically called price optimization. It’s better to think of it as a game of What Can We Get Away with Charging for That? Of course, once price is unmoored from cost, it does two things simultaneously: It boosts margins while allowing suppliers to offer discounts with far less impact on their income.
One supermarket study in the 1990s showed how easy it is for consultants like these to play with price. Interviewers stationed at cash registers asked shoppers for their receipts and staged an impromptu pricing pop quiz. Few, if any, of the shoppers were as price aware as they might have assumed, largely unable to rattle off the cost of a sixteen-ounce bottle of ketchup, for example. Rather, they largely trusted that an endcap was the standard location for sale items and they blithely (and blindly) relied on that truism.
By the late 2000s, almost every price tag had been “optimized.” Consultants earn hefty fees to decide whether to charge 99 cents or $1 for that toothbrush (99 cents, without question, but we’ll get to that). They leave their DNA on every recommended retail price (RRP), including discounts. Over the last few decades, price consultants have developed five gimmicks that are used every day in every store and mall across America. Each is a fail-safe way to trigger a dopamine rush—unless, of course, you stymie the reaction by spotting the trick first.
Think back to that imaginary $1,000 trip to the mall. Price consultants’ trick number one was in effect at Panera, with its $16.99 lobster sandwich. That menu was value engineered using the reference point. Commentators snarked when the 1,400-franchise chain introduced this pricey sandwich in summer 2009 at the nadir of the Great Recession. But it was a masterstroke of menu writing. An absurdly expensive treat became an anchor price, throwing everything else on the list into bargain relief. (An added bonus for the company: Panera’s margin is higher on costlier items, so the chain is glad to serve up an occasional lobster roll to the hungry and foolish.) An entire article in The New York Times was devoted to breathlessly charting the rise of the $40 entrée. What went unacknowledged, of course, was the passel of menu consultants (yep, that’s an industry, too) who was gently nudging those prices up for reasons other than quality. “It’s menu engineering: make sure you have an outrageously priced $125 hamburger and right next to it, the item you want to sell, the one that has the highest margin, and might be priced at $21,” scoffs one price consultant. An ultra-luxury item that’s absurdly overpriced isn’t intended to sell but rather shift your reference point artificially northward, reframing full-price items as soi-disant bargains.
Price consultants rely on what they call mental accounting, our tendency to portion out funds in our heads and earmark them for different uses, like dinners, movies, or clothing. Make a steak seem cheaper than expected by using a high-priced decoy, and it’s a positive utility shock to the brain that triggers dopamine. Less was deducted from that invisible account in your mind than expected. Minutes later, of course, that rush has coaxed you into splurging on a dessert using “left over” money.
Think of these illogically expensive items as the pricing equivalent of a cheerleader’s frumpy friend; Plain Jane amps up the hotness of the rest of the clique simply by being there and making them seem more appealing. Just like that homely hanger-on, no one is supposed to want these items—but if they do, it’s an amusing bonus. High-priced decoys edge a reference point upward and guarantee a dopamine rush over a far greater number of items.
It isn’t just restaurants that rely on that trick, of course. Pick a fashion brand—Coach maybe, or J.Crew—and then ask a sales assistant what the priciest item is in the store. Likely, the answer will be surprising. Maybe it’s the J.Crew Collection spaghetti strap sequined dress ($650) or a Globetrotter suitcase ($1,750). Coach has a smattering of bags for $1,200, like the Caroline, a truly beautiful pleated and gathered leather satchel. Most of the stock at both retailers, however, is $500 or less. Similarly, look at the layout of any department store’s furniture section: good chance there’s a sumptuous and pricey sofa in the center, quickly noticed and admired by everyone. Its purpose is solely to make everything else look more affordable. If Neiman Marcus didn’t pad its holiday catalog with outlandish treats, such as a lifetime pass on American Airlines for $3 million, customers wouldn’t be able to appreciate how much of a bargain that pair of Swarovski-studded Manolo Blahniks truly are.
Reference points are also the reason a so-called manufacturer’s suggested retail price (MSRP) exists on cars or electronics; the stores seem cheap in comparison with the MSRP. It’s the same with advertised reference prices (ARPs)—the power of that “WAS!/NOW!” sticker. And it’s why original prices are proudly touted during markdown season, right there on the same tag. Once we mull buying that lobster sandwich or the sequined dress at J.Crew, our anchor price shifts upward and—presto—the rest of the stock triggers a gentle spritz of bargain buyagra.
Trick number two of price consulting is evident in the trio of TVs you spotted at Best Buy on that fictional mall jaunt. This is Goldilocks pricing, where the most effective bargains are not always the cheapest item in the store. At that imaginary Best Buy, those three Samsung TVs were marked down by 30 percent: a 32-inch for $499, a 40-inch for $699, and a 46-inch for $899. What no blue-shirted staffer would tell you is how uneven of an order the store has placed. Two of those TV sizes are little more than set-dressing, as the store will probably sell a few 32-inch models, and perhaps one or two of the largest option. Together, though, the least expensive and the most expensive help funnel shoppers toward the just-right option: the 40-inch TV (which is likely to offer the healthiest margin of all and will be ordered in dramatically larger quantities).
Goldilocks pricing, also called versioning, uses the reference point in a different way: It identifies a target item and then bookends it with similar offerings that make it both a bargain (cheaper than that 46-inch TV) and better quality (that 32-inch is for skinflint Luddites). Offering just a pair of similar items, shoppers will be drawn to the cheaper one. Present a trio instead, though, and they will gravitate to the mid-priced option. Goldilocks pricing underlies the old three-class carriage system on trains, and why gas is displayed in triplicate.
Look at the appliance departments at Sears or Lowe’s or Home Depot and count the trios. The real difference in features among the items, especially the house-brand models, will be surprisingly slight, but it will be the mid-priced option that is being subtly promoted at every store. High-end stock-keeping units (SKUs) add as much credibility as revenue to any category. Prices for phones at Best Buy Mobile are displayed the same way, in threesomes: the New Family Plan, the 2-Year Upgrade Plan (“That LG Nitro HD 3 is just $49.99 . . .”), and the Regular Price without contract (“. . . unless you opt to buy it without contract, then it costs $649.99”). Of course, restaurants use the threefer model to manage supplies and avoid spoilage on unused food. Imagine a menu that has a chicken entrée for $15 and a fish alternative for $19. That $4 seems significant, so there will be a skew toward the cheaper option. But add a $45 porterhouse steak to the menu and the $4 seems negligible.
Perhaps the most masterful example of versioning is that of Procter & Gamble’s diapers. In 1978, seventeen years after launching Pampers, P & G faced a dilemma. Sure, its revolutionary disposable diapers were so far more convenient than traditional cloth nappies, but shoppers perceived the new-fangled disposables as pricey in comparison to the muslin cloth ones. So the company turned to versioning, and created a premium sister brand, Luvs, that would put Pampers in the middle, between its sibling disposable and the bargain muslins. It repositioned Pampers to the just-right price. Unsurprisingly, sales skyrocketed and the brand became a household name. By the 1990s, with cloth diapers now a charming anachronism, P & G was facing a different problem: warehouse clubs. How could it supply this booming retail market while resisting reductions in the price of Pampers? The solution was simple. Luvs was no longer needed as a premium decoy, so in 1994 it was rebooted as a cheaper alternative to Pampers.
Trick number three that price consultants use at every mall is disarmingly simple. Remember that sign outside The Children’s Place on our $1,000 trip, the one screaming “ENORMOUS MEMORIAL DAY SALE”? Price consultants realized very quickly that marking items down isn’t enough to stoke a dopamine rush in unsuspecting shoppers. Stores must also remind shoppers of the deal at every opportunity, whether or not those prices have actually changed.*
Jargoneers call the DISCOUNT!, BARGAIN!, REDUCTION! signs information cues. Over and over, studies have shown how impactful they can be on what is actually bought. Two professors teamed up to look at the power of flagging sales via a clothing catalog. In three separate and simultaneous print runs, the pair priced the same dress at $54, $49, and $44 to see which would sell better. Customers randomly received one of the three catalogs and the researchers waited to see which price would prove a best seller. The $49 was the winner—probably, as we’ll see, thanks to the trigger of that ending-in-nine figure. In the next print run, though, they tweaked the three catalogs. The prices remained $54, $49, and $44, but an ON SALE flash was added next to all three prices. In this round, sales data was split equally among the trio. So our brains respond to being told something is a bargain regardless of whether or not it truly is.
MIT’s Duncan Simester, one of the professors from this initial study, became obsessed with the idea of bargain response and widened his research from catalogs to real-world retail. He partnered with a chain of convenience stores, tweaking prices of various commodity items in eighteen of its outlets in one city. To iron out variables, Simester used almost two hundred different products for the experiment. These were then divided into three different groups, varying from store to store. Take a bottle of shampoo, for example; in the control group of shops, it was sold in the same way at the same price as before. In a second group, the price was reduced by 12 percent, but no indication of that change was made. In the final group of stores, though the price remained the same, a perky red-and-yellow LOW PRICE sticker appeared on the shelf. In this experiment, Simester’s results were telling: The quietly discounted group sold just over 17 percent more units than the control. But the group with the LOW PRICE sticker also had increased sales, in this case by 3.4 percent. That profit uptick cost the store nothing more than the price of printing a few flimsy sheets of paper. It’s a reminder to double check the true discount any time you’re nudged by a splashy sign to pick up a supposed special offer in the grocery store.
Thanks to its iconic logo, Target scores a bull’s-eye when it comes to trick number four, designed to maximize the sale of bargains. Why are so many store logos, especially those known for good value—J. C. Penney, Target, Macy’s—red? And why, when department store S. S. Kresge launched its discount offshoot Kmart, did it swap out its signature green for red? Red is, quite literally, an eye-catching color. It’s the longest wavelength so, because of a glitch in how our eyes process color, anything red appears closer than it is. It jumps out at us from the landscape, and demands attention. Some scientists suggest this is a holdover from early primates using the shade as a clue to the ripeness of fruits—clearly, if this were the case, prehistoric monkeys would not have been as fond of bananas as their contemporary counterparts.*
Chris McManus, professor of psychology at University College London, has found that the first and second color words to evolve in every language have been black and white. But when or if a third color appears, it is—always and without exception—red. McManus suggests that this lexical quirk has important implications for how the brain interprets red, both consciously and subliminally. The longer the word for a color has been in use, he believes, the greater the number of associations, meanings, and nuances it can acquire. In this way, the color itself gains more impact. In other words, since we’ve been using the word for red far longer than that for, say, purple, it’s embedded more deeply into our psyche. Thanks to both history and physiology, we notice a bright red sale sign more quickly and with greater interest than any other color.
As baby boomers drive the average age of Americans ever upward in the next decades, the power of red will only increase. That’s because the cornea yellows as humans grow older, making it harder to perceive small details, whether differences in stair height—it’s why seniors often trip—or certain colors, especially blue and green. The aging eye sees the entire world through a gauzy, yellowish lens, so that color, too, loses its power of distinction. This leaves black, white, and red to become ever more important and common to attract the boomer shoppers’ attention.
The fifth and final trick that price consultants employ every day is number theory. Think back to the prices themselves on that trip to the mall—that $110 dress at Nordstrom, those $7.77 romper suits at The Children’s Place, and Target’s $12.99 sunglasses. Retailers know that prices ending in 9 indicate a value product (such as throwaway sunglasses), while a 0 ending shorthands premium and prestige (designer clothing), and 7 or 8 endings signal items priced to move and closeouts (those onesies, the Heinz ketchup, and the paper towels). Divining why we ascribe such irrational meaning to numbers is neuroeconomics’ most delicious conundrum.*
Countless experiments have charted the effectiveness of these theories around certain digits. Take the study undertaken by a joint team from two universities in which volunteers were offered the chance to buy two similar pens. In the first round, one pen was priced at $2 and the other at $3.99; while the second time, they were priced at $1.99 and $4. A single cent difference caused a 26 percent drop in sales in pen number two. While the price difference was negligible, the sales figures contrasted sharply: 44 percent of the volunteers bought the $3.99 pen, while only 18 percent of them chose the $4 pen. A clique of French academics undertook a similar test, commandeering the grocery department closest to every Gallic heart: cheese. Some of the fromage by-the-pound was priced with sharp endings, or 9, and others with whole numbers, ending in 0. The researchers tallied the purchases of 250 shoppers and found that—voilà—the amount of Camembert and co with prices ending in 9 sold an average of €6.53 (around $8.50), while those ending with 0 sold on average just €5.08 (or $6.60). A bargain price juiced the final tally by almost two bucks.
One price consultant even estimates that a $9.99 price tag can, on average, sell 10 to 20 percent more product than a $10 one. Rutgers marketing professor Robert Schindler has spent his entire career studying such dopamine-sparking values, especially retailers’ reliance on that .99 ending. One of his most famous experiments involved a fashion company’s semiannual clearance catalog. Schindler worked with the firm to divide its usual 90,000 print run into thirds. In the first set of catalogs the prices would end in .88, the standard markdown that would act as a control group. The second set offered identical merchandise with prices ending in .99. And the third set advertised those items with prices ending in .00. Schindler found that sales were 8 percent higher on the .99 catalogs than the .00, despite the price (and profit) difference being just three hundredths of 1 percent. He doesn’t believe that it’s always strategic to goose sales with that bargain trick, though. “Any products with physical risk, stay away from nine endings,” he says. “A dentist? Eye surgery? It suggests it’ll hurt.”
Prices ending in 7 or 8 are most common in clearance racks or at retailers whose reputation rests entirely on good value, such as Costo or Walmart; they’re intended to imply a constant spigot of bargains. Prices such as $36.17, $19.08, or $7.77 also seem deliberately exact, a tacit suggestion of a return to the pre-consultant practice of cost-plus pricing. With that $36.17 tag, it’s as if Walmart is saying, Honest, ma’am, I’m just passing on a standard markup, based precisely on the exact per-unit cost. If only that were true.
Retailers like Walmart aren’t alone in massaging prices, combining sharp and whole numbers to communicate contrasting ideas of premium or good value. The most common example is across the shoe sector, where cheaper styles might often start at $29.95 or $49.99, continuing through to $69.99 or $89.99. As soon as a particular brand wants to switch its customer base from bargain hunters to status seekers, it adjusts its pricing: to $130 or $150, for instance. (See how Johnston and Murphy’s cheapest pair of shoes costs $98, while the prices of the rest end in 0.) Value-driven shoppers can feel smart, while shoe fetishists will feel indulged. Fast fashion retailer Uniqlo, the Japanese answer to Gap currently mushrooming across America, prices its jeans at $39.90, shirts at $29.90, and T-shirts at $12.90. The chain claims that the practice is a holdover from cultural norms in its home country—etiquette deems 10 yen change more polite than a single penny, apparently—but it’s a stroke of pricing genius that any consultant should envy. Those 9s underscore cheapness, but the 0 presages quality.
There’s no better master class in price manipulation than the infomercial, though. Take the one for Cami Secret, an unremarkable product akin to a burka for your bosom, a scrap of fabric edged with lace that attaches to a bra, preserving modesty in plunging necklines. Cami Secret’s pricing strategy combines number theory with the reference point to drive a double spurt of wallet-opening dopamine. The velvety pitchman first offers three Cami Secrets for $19.99, then doubles that offer to six for the same price. Once he’s established that deal, the voiceover slashes the price in half, to $10. It’s a 50 percent discount off an arbitrary but much-repeated price, with the final cost reduced to a whole number, telegraphing quality in that markdown. Given that the per-unit cost of producing a lacy square of fabric is probably less than a couple of sticks of gum, it doesn’t make it a truly good value, but the tricks engineer an illusion of a great deal.
Why do these irrational pricing tricks work so effectively? Think of the turn of the millennium or a fortieth birthday—both single-year increases that are rationally no different from any other, yet carry emotionally more heft. This is what’s called the left digit effect, where we focus on the first number we see. When our brains are bombarded with prices, they have a limited capacity for filing away that information. Rounding them down for efficiency is like compressing a file to save on hard drive space. Research has shown that the human brain can hold only one and a half to two seconds of spoken information; the more complex a price, the harder it is for us to remember. We remember $4 as is, but $3.99 is abbreviated to $3 for efficiency (by one study’s findings, every extra syllable in a product’s price decreased our ability to remember it by 20 percent).
Explaining the appeal of buying on sale, then, is simple. It boils down to the fact that bargains are physiologically desirable, even irresistible to some, combined with a raft of learned tricks that retailers use to trigger a surge of spend-thrifty dopamine. We know, though, that deals have become more effective, and more commonplace, than ever before. To see the reason why, let’s take a trip to the local drugstore. Just don’t bring your wallet—you’re still paying off that $1,000, after all.