Red-tag sales are pretty much Pavlovian. Case in point: About a month ago, someone posted a link of a Lauren Ralph Lauren coat from Macy’s to the Male Fashion Advice subreddit (MFA). They wanted to know if at even 70 percent off — 70 percent off!!! — the jacket was still worth paying $150 for.
After seeing the original price of $495 slashed through, I too, as someone who definitely doesn’t need another coat, thought for a second that I should buy one as well. Here’s the thing, though: That coat isn’t actually on sale. Or rather, it’s always on sale. “Stop treating Macy’s sales as if they’re real,” a stalwart MFA denizen warned the rest of us. “They’re not. Their sales and their [recommended retail prices] are fake. Nobody has ever paid $495 for that coat.”
It’s a retail strategy known as anchoring, and according to Ying Zhu, a marketing professor at the University of British Columbia, it’s one of the oldest tricks in the book. She cites the definition from Harvard Business Review: “The anchoring effect is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the ‘anchor’) when making decisions.” In short, the anchor is fool’s gold.
Zhu uses Apple’s 2010 presentation of the iPad as a perfect example of how anchoring works. Near the end of the presentation, Steve Jobs asks the auditorium: “What should we price it at?”
“First Jobs establishes an anchor of $999,” says Zhu. But after explaining that in conjunction with their technical goals, Apple wanted to make the iPad available to “lots of people,” he announces that the new product will actually be $499. “The iPad hadn’t even been released yet, and you already felt like you were getting it on sale,” Zhu tells me.
Although anchoring is technically considered illegal because it misleads consumers, the Federal Trade Commission hasn’t given any teeth to this since the 1970s, per Kevin Brasler, executive editor at Consumers’ Checkbook. Brasler has conducted several experiments where he’s cataloged the prices of various goods at Kohl’s, Macy’s and Sears. “We were looking at the same lawnmower for nine months, and the so-called special weekly discount price was available the entire time,” he explains.
The problem is, it never stops making people feel like they’re a savvy shopper getting a sweet deal. “The math in a person’s head becomes, ‘look how much money I saved,’ instead of focusing on how much they spent,” Zhu says. Couple that feeling with the fact that the sale price is usually written in red ink, and “it’s like, ‘If I don’t take action — and quickly — I’m going to subject myself to regret.”
The anchoring effect is such a powerful strategy that Zhu ties JCPenney’s downfall to not using it. In late 2011, JCPenney tapped Apple executive Ron Johnson to be their next CEO. Johnson’s bright idea: Change the department store’s pricing model, to make the retailer more interesting to wealthier shoppers. Basically, nothing was on sale, which, of course, alienated JCPenney’s loyal customer base, who Zhu says was mostly made up of low- and middle-income people.
Interestingly, though, it wasn’t because prices went up; it was just that the price tags looked different. “Those customers were there because they were looking for a deal,” Zhu tells me. “Once the deal was taken away, even if only in theory, why would they still go to JCPenney?”
That anchor then was more of the ship variety — instead of tethering customers in place, it sunk the whole operation.