Fake Sales at Top Retailers: The Power of Discounts

Los Angeles City Attorney Mike Feuer filed a lawsuit against Macy’s, Kohls, JC Penney and Sears for deceptive advertising. These firms allegedly advertised a high original price with a low sale price without ever having sold the product at the advertised original price. The law in California states that these firms must have sold the product at the original price within the previous three months.

We will let Mike Feuer deal with the legality. Let’s talk about the power of discounts.

Assume a product sells for $10. You want this product and are willing to pay the price. However, how much better would you feel if you knew the product normally sells for $20 and you could buy it at $10? If you think about it, the normal price should be irrelevant to your decision. But it’s not. It feels so good to get a discount.

This is one implementation of a concept called reference price. A reference price is simply the price the shopper believes the product should sell for. Reference prices are formed many ways. One way is when a shopper has shopped for a period of time, knows the price of a product and then sees it go on sale. This is based on the shopper’s own observations.

However, businesses are able to manipulate reference prices. Some companies write something like “sold elsewhere at $20” on the price tag. It is possible to price similar products near this one at $20 so the lower-priced product looks like a good deal. They often advertise the suggested retail price. The easiest way to set a reference price is to simply lower the normal price of an item and be sure to let people know you lowered the price.

However, in this case it appears that these retailers simply lied. They said the product used to sell at a higher price, but in reality it never did.

Unfortunately this deceptive practice seems to happen online a lot. As an example, I chose a product, the Nikon D7200 DSLR (body only) camera. List price on the NikonUSA site shows $1199. However, several sites show the list price at $1299. And one site showed the list price as $1500.

Kudos to two big retailers, BestBuy and Amazon, who properly showed the list price as $1199.

Perceived discounts are a powerful marketing tool. As marketers we should consider them, but let’s be sure to remain ethical. Please don’t lie to your market.