T-shirt A: $60
T-shirt B: $100-40% discount.
If the 2 t-shirts above are exactly the same, same brand, same design, and same material, which one would you choose?
Apparently, the majority would choose B even both cost $60.
This is the “law” of relativity in economics. People tend to go for the “better” deal, thinking that they’ve just “saved” $40 even though the amount they spend would be the same – $60.
Apparently, the former CEO of JCPenny, Ron Johnson learnt it the hard way. When he was called in to save JCPenny, he decided to change the discount store image by being “honest and fair “ with their pricing.
So instead of the usual markup, and then sell it at a discount (eg: $210 before a 30% discount coupon), he decided to price their stuff at the “honest and fair” level (eg: $150 without any discount coupon).
But the bargain hunters stopped coming. Everyone hated JCPenny, and Ron Johnson. And consequently JCPenny suffered a loss of more than US$900 million that year.
It goes without saying that Ron lost his job as the CEO.
In case you don’t know who Ron Johnson is. He’s the retail superstar credited for making Target hip and turning the Apple Store into a monster success story. So he’s not like some “nobody”
So what’s the lesson learnt? It doesn’t pay to be honest at times; just give what the people, in this case, the bargain hunters want.
A side lesson is: Thinking like an economist can save you lots of money.
Post inspired by Dan Ariely’s book: Dollars and Sense
