By Vengat Narayanasamy
Could list prices be a thing of the past? The list price is also known as the “original price” or the “manufacturer’s suggested retail price.” List prices are typically higher than the prices of the goods listed and the user sees the difference in the form of savings before they make the purchase. The purpose of showing a list price and a much lower “our price” is to impress upon consumers they are getting a good deal.
Amazon, the online retailer, is intentionally scrapping list prices and there will just be “one price” for any given item mentioned on the website. Comparison pricing firm Rout estimates that approximately 29% of products on Amazon did not display a list price in May 2016, and that number has now increased to approximately 70%.
The New York Times gathered a roundup of 47 random products sold on Amazon. In a recent check on these products, 39 of them no longer had list prices shown on the site. Other studies have also indicated that list prices are being phased out at Amazon. In some cases, Amazon is instead subbing in a comparison for the previous price listed at Amazon itself, rather than some list price cooked up by a manufacturer.
Eliminating list prices is not new to the market. Remember J.C. Penney Company's introduction of “everyday low prices” several years back? Tired of the frequent sales game, JCPenney offered everyday low prices and the company essentially said to customers, "Trust us, our ‘Fair and Square’ prices are the best." However, customers weren’t convinced and, as a result, JCPenney’s stock price dropped from over $43 to under $15 in fewer than 15 months. JCPenney quickly reverted to high list prices and a frequent sales cycle.
Yet, when things are always on sale, it’s impossible for shoppers to tell if anything is on sale—or if anything is truly a good deal. Consumers have grown so frustrated with store pricing that they’ve sued retailers like Macy’s, Jos. A. Bank and JCPenney for listing fraudulent original prices that no one ever paid.
Since consumers are suspicious about the honesty of list prices, why are they so important? No one wants to overpay for products, yet it’s a hassle to check product prices at other retailers. A high list price creates an anchor in consumers’ minds. It is then used to evaluate whether or not an actual price is a good value. However doubtful consumers are on list prices, the “got a better deal” feeling still plays a huge role in closing the sale.
Amazon has built a reputation over the past two decades and hit $100 billion in annual revenue by offering deals. The first thing a potential customer saw was a bargain - how much an item was reduced from its list price. And as consumers, we have been conditioned to buy only when things are on sale. The major drawback of scrapping the list prices or any type of reference price is that consumers won’t have a baseline to help evaluate the worthiness of Amazon’s prices.
Will Amazon succeed in their new way or will it lead to JCPenney’s path? Amazon is a data-driven company and by now it should have a good understanding of its new experiment. Behaviors of its prime and non-prime customers, product categories where the list prices are critical and not critical, percentages of closed sales while the list prices are mentioned or not, are some of the parameters that will determine the new pricing strategy for Amazon, and soon for the rest of the world.
It took 20 years for consumers to trust online retailing with their personal information, and now retailers are asking them to blindly trust that its prices are “the best.” Will it work? Time will answer this question.
For more interesting thinking on procurement, visit the GEP Knowledge Bank.
Vengat Narayanasamy is a Senior Director at GEP and is based in the Clark, N.J. office. Narayanasamy is a seasoned supply chain professional with a strong focus on procurement transformation, strategic sourcing, supplier relationship management, procurement process outsourcing and procurement organization design. He has worked globally across multiple industries including CPG, automotive, chemical and industrial manufacturing.
George E. Krauter
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