Cheap (10 page)

Wal-Mart and other large discounters aggregate the power of millions of individual buyers to gain leverage over their suppliers. This “consumer union,” a consolidation of millions upon millions of shoppers, has largely substituted for the labor unions that once protected the nation’s workers but in recent years has shrunk to less than 8 percent of the private-sector labor force. The larger the discounters grow and the larger this union of consumers grows, the greater their leverage and the tighter the squeeze. It is not Wal-Mart or Target but us, the consumers union, that is the force with which all these other forces and entities must reckon. The power to wring an extra 20 percent of cost out of bargain basement goods is what makes mega-discounters such as Wal-Mart so appealing to consumers. The leverage to do so while maintaining record profits is what makes discounters so appealing to investors.

Technology, globalization, and deregulation have made competition a death march. Many companies have had no choice but to reduce costs almost continuously. Since payrolls are the single largest expense of most businesses, jobs, benefits, and wages are the obvious places to cut. This means fewer jobs and even fewer secure, well-paying jobs with benefits, the sort of jobs that Americans once built their lives on and now seem to believe the country can no longer sustain. And there are other places to cut as well: quality, safety, environmental responsibility, and human dignity. As citizens we recognize this “collateral damage,” deplore it, and frequently decry it. But as consumers we habitually downplay and ignore it. We rail against exploitation of low-paid workers in Asia as we drive twenty minutes to the Big Box to save three bucks on tube socks and a dollar on underpants. We fume over the mistreatment of animals by agribusiness but freak out at an uptick in food prices. We lecture our kids on social responsibility and then buy them toys assembled by destitute child workers on some far flung foreign shore. Maintaining cognitive dissonance is one way to navigate a world of contradictions, and on an individual basis there’s much to be said for this. But somehow the Age of Cheap has raised cognitive dissonance to a societal norm.

On May 1, 2008, the
New York Times
ran a cover story in its Styles section headlined “Is This the World’s Cheapest Dress?: How Steve & Barry’s Became a $1 Billion Company Selling Celebrity Style for $8.98.” Reporter Eric Wilson reveals the secret of the store’s success with a quote from co-owner Steve Shore: “‘To be great, you have to have these ridiculous, insane prices, and not sacrifice quality,’ [Steve] ‘The question we constantly ask ourselves is how to hit the price point that even Wal-Mart is not hitting.’ ” How, indeed? Shore and his co-owner Barry Prevor claim to have kept prices low by flying economy class, staying in cheap hotels, maintaining a rundown office in New York City, hiring mostly twenty somethings, and cutting out the middleman. Careful consumers know this begs the question. We know that $8.98 will barely cover the cost of two large cappuccinos at Starbucks. How then can it be the purchase price of a fully formed dress? Interestingly, this question was anticipated. As Wilson reported, “Though the prices will raise concerns that the clothes are made in sweatshop factories that underpay or otherwise exploit workers, Mr. Shore and Mr. Prevor said absolutely not.”

How is it possible that without exploitation, criminality, or deception, a $8.98 dress could be designed, sewn from real cloth in India or China, packed in a shipping container, shipped thousands of miles, unloaded into a truck powered by diesel fuel, driven smack across the country, unpacked by human hands, hung on a hanger, and displayed for at least a day or two on a Manhattan shop floor? The answer to this question is that it is not possible or, for that matter, sustainable. Shore and Prevor kept their operation afloat by locating stores in struggling malls and charging them an up-front fee for the favor of attracting foot traffic. Since these mall fees were essential to its survival, the company was required to expand continuously. In a sense, the company relied for its existence on a fully legal variation of a Ponzi scheme. Business plans like this are not built on a foundation of frugality. They are built on a platform of cognitive dissonance. Three months after boasting of their great success to the
New York Times,
Steve and Barry filed for bankruptcy.

 

 

 

THRIFT MAY BE
a bedrock American virtue, but it is no more branded into our DNA than it is branded into the DNA of any other culture. Benjamin Franklin, whose most famous homily translates roughly into “A penny saved is a penny earned,” confessed that thrift would elude even him were it not for Deborah, his frugal and hardworking wife. In a letter to a friend he wrote that “frugality is an enriching virtue, a virtue I could never acquire in myself.” Thrift connotes some level of sacrifice and self-discipline, of patiently weighing one’s options and forgoing the immediate for deeper satisfactions. A thrifty person digs in for the long haul. But in the era of cheap, the long haul is hard to see, let alone plan for. The view of thrift has been obstructed for some time now. Writing in 1938, William L. Nunn, chairman of the Newark Labor Relations Board, observed that as Americans moved from farm to crowded urban centers, the place of thrift in society shifted, too.

A thrifty person does not drive miles to save three bucks on tube socks. A cheap person might. Every schoolchild knows that cheap thrills are not thrilling, and cheap talk not worth listening to. In books and theater and movies, the cheapskate is either the bad guy or a figure of fun. Yet we are all drawn to Cheap. Cheap is about scratching the itch, about making real the impossible dream of having one’s cake and eating it, too. While it goes too far to suggest that Americans are addicted to Cheap, it is certainly a national preoccupation and a priority. We demand and expect it, and miss it terribly when, as with rising gas and food prices, it lets us down. At the same time we revile it.

What to make of this seeming paradox, this dysfunctional relationship we have with low prices? There is no easy answer. America’s pursuit of and dependence on Cheap goes beyond public policy to something far more fundamental. It is etched deeply into the national psyche but also into each of us, part of who we are not only as a culture but as individuals. The psychology of Cheap is both fascinating and frightening. And it all begins with price.

What happens is fact, not truth. Truth is what we think about what happens.

ROBERT MCKEE, STORY: SUBSTANCE, STRUCTURE,
STYLE AND THE PRINCIPLES OF SCREENWRITING

 

 

 

 

 

 

The Behavioral Pricing Conference at Fordham University did not fulfill the glamorous promise of its Lincoln Center address. Passing through the security gate and into the dingy lobby only deepened the gloomy prospect of spending two sparkling autumn days cooped up in a darkened lecture hall with a pack of pricing geeks. Still, my fellow attendees were chipper and surprisingly colorful. Among them, two spike-haired economists jet-lagged from their long flight from Finland and clutching cans of Red Bull settled in behind a puckish Turkish academic. That afternoon the Turk told me sagely, “Unlike you Americans, Turks know the price of everything.”

Pricing theory respects no boundaries, and this conference, organized each year by two Fordham University marketing professors, brings together the top experts from around the globe. It is a tightly knit group, which makes for some startlingly frank conversations. Over coffee the first morning a marketing professor boasts of his consulting gig with McDonald’s, where he is reconfiguring the menu board to make it easier to navigate. I find it hard to imagine how McDonald’s could possibly make its menu navigation any simpler—and mutter something about my daughters picking out a Kid’s Meal from ten paces before they could read. Hearing this, the marketing professor, an expert on pricing in the hospitality industry, leaped to clarify. “Don’t you see there is a long distance between the burger and the price on the menu?” he said, pulling out a pen to draw a diagram on a napkin streaked with muffin residue. “That great distance causes people to lose their place, and it takes them a long time—wasted time—to find it again. My idea is to bring the price and the item closer together so that customers see instantly that a burger costs this much, French fries that much. The savings in time add up to about eighty thousand dollars per restaurant per year.”

So repositioning a list of digits on a menu board can really save a restaurant eighty grand a year. One might think there would be objection to this supposition, and there was: Drexel University marketing expert Rajneesh Suri said that the cost savings could be even higher. Suri’s research shows that positioning prices on the left side of a menu rather than on the right allows people to access and process the price point more quickly. “The same price in different visual fields will be processed differently,” he said. Apparently the left side of the brain is better equipped than the right to decode numbers and letters. Placing prices far to the left allows customers more opportunity to decode quickly, helping franchisers shave still more fractions of a second off each customer’s purchasing decision and thereby greatly increasing efficiency and saving millions.

Corporations spend billions of dollars for such insights every year, but not all of them are golden. For example, other experts I spoke to had doubts about Suri’s theory. Apparently the human eye scans so quickly that the difference in response time between right and left price placement is inconsequential. Yet the very fact that such exacting research is under way—and bankrolled by major corporations—is evidence that price, or more precisely the way in which consumers perceive price, is a central business obsession. History reveals it is a human obsession as well.

The medieval philosopher Saint Thomas Aquinas noted the irony that in God’s eyes, living things are of greater worth than are inanimate objects, but in the marketplace we pay more for a slice of bread than for a mouse. There is a difference, Aquinas held, between “natural value” and “economic value.” Natural value is based on inherent worth, while market value is based on supply and demand. Considerations of market worth dating back to the Romans affirmed quite sensibly that the “value of a thing was the price for which it could be sold.” But Aquinas took a more nuanced view, observing that what people were willing to pay depended a good deal on what they were able to know. As illustration he told a story (borrowed from Cicero) of a merchant driving a wagon piled high with wheat into a town sunk deep in famine. The merchant knew that there were other wheat sellers behind him on the road and that the price of wheat would drop when they arrived. Is he morally obligated to tell the starving townsfolk that more wheat is on the way? Aquinas reluctantly concedes that he is not, writing that “disclosure or reduction in price would spell more abounding virtues, yet is not required by strict justice.” Strict justice, then, allows sellers to keep buyers in the dark, and it is that darkness that makes it difficult—and sometimes even impossible—to ferret out value even today.

If, as pundits say, Americans are intimidated by numbers, prices are a notable exception. We encounter prices so often that we feel comfortable with them, but maybe we shouldn’t. As Aquinas hinted, prices are devilishly slippery things, open to interpretation and manipulation. When I told Harvard Business School sociologist Gerald Zaltman that I was trying to pin down the meaning of price, he laughed. “There is nothing more subjective,” he said. “Price is a convenient, necessary proxy for a lot of other things. But where does the meaning of price reside? What are the things that influence its meaning? By this I mean you get away from price as a “given” to price as an interpretation. Price in and of itself has no meaning at all. Price is so vexing because the meaning of price resides not on the sticker but in people’s heads.”

All prices come down to a number, of course, and numbers are absolute, or at least seem to be. But numbers carry meaning that goes beyond their numerical value. For instance, the numbers one, two, and three are used far more commonly than are all other numbers except when they happen to be the final digit of a price. Very few prices end in the numbers one, two, three, or, for that matter, seven or eight. How often have you bought an item priced at $4.32 or $100.07? Those prices seem odd and even suspicious. Generally, prices are rounded to make them easier for our number-phobic minds to grasp. In his seminal and lively
The Number Sense,
Stanislas Dehaene, a mathematician and cognitive scientist at the Institut National de la Santé et de la Recherche Médicale in Paris, explains why “sharp” prices—such as $96.08—might make us nervous: Numerals we call “round” can refer to an approximate quantity, while all other numerals have a precise meaning. It is simply not credible to price every item to the penny. How could the seller possibly arrive at precisely $96.08? Why not 2 cents more or 8 cents less? We expect and prefer our prices rounded off because, thanks to a quirk of evolution that gave us five fingers on each hand and five toes on each foot, we tend to think in multiples of five and ten. The metric system is built on powers of ten, as is our monetary system. This system, Dehaene writes, “fits our number sense because it approaches an exponential series while comprising only small, round numbers.”