Moneytips.com: Price anchoring 101

Indianapolis, US - June 30, 2016: JC Penney Retail Mall Location. JCP is an Apparel and Home Furnishing Retailer V

(Moneytips.com) — Many years ago, Mad magazine ran a parody of advertisers that outlined the fictional practice of quadrupling the price of an item and putting it on sale for 75% off. They called this practice the “Law of Supply and Idiots.”

Price anchoring is not quite so egregious, but it is an extension of the same principle — and nobody finds it amusing. Price anchoring involves inflating the original price to make a discount seem more enticing. That may be questionable, but it is generally acceptable. However, if you rarely or never offer the product for the original higher price, and run it on a perpetual discount, that is deemed to be deceptive advertising.

The Federal Trade Commission (FTC) has ruled that retailers must offer items at the original price for a “reasonable length of time” before markdown. The reasonable length of time standard provides some leeway and depends on the nature of the product (seasonal items, for example).

JCPenney is well known for price anchoring, as are other retailers, but it is the one who dealt with the most recent prominent lawsuit. A Los Angeles District Judge certified a class-action lawsuit in 2015 against JCPenney that represented those who bought private label or exclusive items from the chain’s stores in California between November 5, 2010 and January 31, 2012.

JCPenney had to settle a price anchoring class action lawsuit last year for $50 million. The suit stemmed from transactions by the lead plaintiff Cynthia Spann. Spann purchased three blouses for $17.99, at a 30% discount from the original $30 price. With research, Spann discovered that the $30 price hadn’t been offered within the past three months, nor had any discount price other than $17.99 been offered. That made $17.99 the true original price in Spann’s eyes, and thus the “30% off” advertising was fraudulent. Besides making the $50 million available to class members, JCPenney also agreed to improve its price comparison advertising practices.

Other retailers have prevailed when price anchoring was challenged, such as men’s clothier Jos. A. Bank. Most of us have seen the Jos. A. Bank ads proclaiming to buy one clothing item and get some ridiculous number free (up to seven at one point). A class action lawsuit filed in 2012 regarding their perpetual sales was thrown out in early 2013. In that case, the judge ruled that the plaintiffs did not sufficiently prove that the sale price equated to the true regular price, and plaintiffs did not suffer an injury from Jos. A. Bank’s pricing.

Ironically, in 2012, JCPenney’s CEO Ron Johnson changed the JCPenney format to more of the Wal-Mart model of “fair and square” regularly low prices, eliminating the discounts. JCPenney’s sales plummeted, Johnson was ousted, and the discounting strategy returned shortly thereafter.

Does that imply that the “Law of Supply and Idiots” is valid? No — but it does point out the psychological powers of thinking you are getting a bargain, which is why the deceptive practices charge is important. If price anchoring did not have a tangible positive effect on sales, stores would quit doing it. As long as JCPenney (and other retailers) actually offers the item at the higher price often enough to meet the FTC standard, everyone is okay.

Mad magazine was a little harsh toward both the retailer and the consumer, but they did illustrate a point that is still valid today. Shop around, be skeptical toward any sale prices, and whenever possible, find some sort of independent price reference before buying an item. If it’s an exclusive item, consider tracking the price for a while. 30% off a fictional, never offered high price is no bargain at all.

You can find additional Money Tips here or visit their website.

This article was provided by our partners at moneytips.com.

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