A long, long time ago (well, 16 centuries to be more exact), the world’s first noted bazaar assembled in the Middle East. Everyday, people gathered in the dusty, hot markets at the junction of the most important trade routes for one purpose: to get their haggle on.
The courtship between merchants and shoppers could get quite steamy: vigorous negotiating was necessary to find equilibrium on every price point. The harder the shopper bargained, the more rewarding his purchase; likewise, merchants were able to move product and make a small fortune. Each successful transaction was positively reinforced with a release of dopamine from the nucleus accumbens–the brain’s pleasure center. Haggling was addictive!
Fast-forward 1600 years. The open air marketplace is now replaced with air-conditioned malls, bedazzled electric logos and online shopping. Heated haggling between buyers and sellers is virtually extinct but replaced with a different kind of bargaining tool– the coupon. And people are wild for coupons, because the one thing that hasn’t been changed from the 4th Century to the 21st, is the desire for a good deal.
The Shopaholic Brain
When people see a product they want, like a new tablet or a pair of shoes, it triggers the nucleus accumbens, the so-called “sex and money” pleasure area of the brain. This patch of tissue becomes active when humans receive a reward, like money, food, and even drugs. However, when people are shown the price tag of a product, it stimulates a part of the brain known as the insula, which is associated with pain, such as detecting unpleasant odors. (Financial Post) Merging the instant gratification achieved with retail therapy to the financial reality becomes the tricky point. (U.S. News)
How do we define a good deal?
A major part of the purchase decision-making process is influenced by a little phenomenon called anchoring. In a world where a simple t-shirt can cost either $5 to $180, anchoring helps the average consumer decide how much something should cost.
Anchoring, as described by Science News, “…brings a sense of certainty to the uncertain, giving the shopper a wisp of information for evaluating purchases. Since most of us are pretty disconnected from where our products come from and how they are made, we often use price as a major data point when it comes to evaluating whether that sweater, headset or jar of jam is worth buying.
This means that when a t-shirt costs $5, we may unreasonably believe that it’s a low quality good. However, mark up that same shirt to $180 and suddenly we perceive an inflated sense of value. Surely this costs $80 because tree-elves weaved with cotton pulled from the clouds. We make this association to justify the price, but that still doesn’t make the item affordable. Bring in our lovable coupon friend to the mix and you’ve got yourself desirable, accessible merchandise pursued by a flurry of dopamine-happy shoppers.
The Macy’s Case Study
In 2007, Macy’s acquired 410 new department stores and decided to set themselves apart from lower-priced competitors by adding exclusive designer lines and reducing coupon circulation.
In silent protest, shoppers simply stopped going to Macy’s, leading to a major drop in sales and a drop in stock by more than 40 percent (NY Times). Ouch. Macy’s quickly changed their strategy, brought back coupons and regained footing as their sales overall increased (Business Wire).
Surprise! History repeats itself: the JC Penney Case Study
In 2012, JC Penney had a new CEO onboard who led the way for seemingly exciting changes. They started off by emphasizing their “everyday low prices” program, slashed price tags by 40%, and effectively eliminated coupons.
One small problem: JC Penney forgot about that inherent instinct within us to haggle. They forgot about anchoring, and the high that people feel when they’re saving money. They thought people evolved; we didn’t. People love their discounts. Like really love them. While “everyday” low pricing sounds like something we should all want, history has shown that it just doesn’t work as well. It lacks a certain oomph… or should we say “oeuf”?
Survival of the Fittest
Consumers have repeatedly proven to merchants that nothing is more exciting to them than getting something they covet for a great price. With anchoring, people have an idea of how much something should cost, but that doesn’t necessarily make them want to buy it. Additionally, indecisiveness strains the brain, says economist Paul Zak, Ph.D., of Claremont Graduate University: “You have a limited amount of mental energy, and your brain wants to conserve it.” (Women’s Health)
By offering coupons and coupon codes, merchants can sway anchoring, minimize guesswork and help steer consumers to the right purchasing decision for them. The elated customer will return for more, because in the end, as the NY Times stated, “people don’t want a fair price. They want a great deal.”