J.C. Penney believed that customers were yearning for a more fair, honest, straightforward pricing model. This new model would have no coupons, discounts, sales and/or fine print — and rather just tell the customer what the price is.
This new policy required, of course, marketing.
One such advertisement touting the “fair and square” pricing model featured an auctioneer counting down (as auctioneers sometimes do.)
J.C. Penney implied that their new pricing would not include any “pricing games” apparently intrinsic in auction marketing.
However, as we look at J.C. Penney’s first quarter financials, it appears their customers (and maybe most all customers) prefer “pricing games.”
J.C. Penney’s first quarter revenue was 20 percent off last years, and customer traffic fell 10 percent.
Analysts concluded that many/most consumers:
- Place value on discounts more than price.
- Purchase on perceived value rather than price.
- Seem indifferent to total price shrouding.
Shrouding is to conceal, or hide from view. A very good research paper on this subject was written by:
- Xavier Gabaix
MIT and the National Bureau of Economic Research
The complete research paper is here, and is worth the read: http://aida.wss.yale.edu/~shiller/behmacro/2003-11/gabaix-laibson.pdf
However, did this J.C. Penney “experiment” uncover something material about auctions and/or auctioneers? It seem so.
Auctions/Auctioneers shroud the total purchase price of property all the time — and discounting and perceived values are regularly promoted. Maybe these are contributing factors in why consumers are drawn to auctions?
What is concealed in the total purchase price at auction? Here’s some common examples …
- Buyer’s premium.
The auctioneer says, “I have $500 and I would like $550,” when the actual purchase purchase price with a 10% buyer’s premium would be more accurately, “I have $550 and I would like $605.”
- Sales tax.
The auctioneer says, “I have $500 and I would like $550,” when the actual purchase price with a 7.5% sales tax would be more accurately, “I have $537.50 and I would like $591.25.”
- Buyer’s premium and sales tax.
The auctioneer says, “I have $500 and I would like $550,” when the actual purchase price with a 10% buyer’s premium and 7.5% sales tax would be more accurately, “I have $591.25 and I would like $650.38.”
Further, do auctioneers suggest your purchase price is a discount? Do auctioneers highlight that you are purchasing at a perceived value, rather than a known price? They sure do …
The auctioneer says, “I’d like $1,000 to start it out … $1,000! Start me at $200, thank you, and now $225, $225 … $225 bid, now $250 …” Bidders are encouraged to think they might get this $1,000 item for as little as $250 — a $750 discount.
- Perceived value.
The auctioneer says, “I have you at $500 and I’d like $550, $550 … thank you, Mary that’s $550 now $600; she’s on at $550 and I need $600.” Bidders are reminded that they are bidding just one more bid than what someone else (the market) is willing to pay — their bid is the perceived value of the property rather than a fixed price.
Wouldn’t it have been interesting if the auctioneer in the J.C. Penney advertisement finished the final take of the commercial — and then told J.C. Penney representatives:
- “Well, that was fun. But, your new fair and square pricing model isn’t likely to work. As an auctioneer, I can tell you we have known for thousands of years that perception, discounts and shrouding lead to greater bidder participation, and higher prices … now you guys have a great day.”
Mike Brandly, Auctioneer, CAI, AARE has been an auctioneer and certified appraiser for over 30 years. His company’s auctions are located at: Mike Brandly, Auctioneer, Keller Williams Auctions and Goodwill Columbus Car Auction. His Facebook page is: www.facebook.com/mbauctioneer. He is adjunct faculty at Columbus State Community College and is Executive Director of The Ohio Auction School.