When almost no one pays full price, what does “full price” even mean? From cars to college to health care, consumers today are surrounded by huge markdowns—which, when you think about it, wouldn’t exist if goods and services weren’t marked up so high in the first place.
Why is the consumer landscape filled with prices that no one is really expected to pay? You know, the “original” or “compare to” prices, also known as “MSRPs,” which are typically listed right next to the actual purchase price. If almost no one pays a list price, isn’t it meaningless?
Not entirely, says Kit Yarrow, a consumer psychologist and occasional contributor to Time.com. “People really aren’t very good at calculating the worth of a product or service,” she says. “It might seem like they should be jaded, but consumers still absolutely, positively rely on list prices to determine value.”
Marketers love to use the concept of an “original” or “suggested” price as a way to convince shoppers they’re getting a can’t-pass-up bargain. As a result, we’re surrounded by initial prices that buyer and seller alike know are unrealistic and inflated, and yet that somehow serve a purpose—as a point of comparison, or as a starting point for negotiations. Life would probably be a lot less frustrating and confusing if fake “full” prices didn’t exist in many areas, including these:
Anyone who has ever looked closely at a bill from a hospital knows that the health care pricing systems in the U.S. are completely absurd. In Steven Brill’s recent TIME cover story about overinflated medical bills and why health care in general has become so expensive, many hospital representatives admitted that the initial prices listed on bills—decreed by someone or something called the “chargemaster”—are basically meaningless. “Those are not our real rates,” one hospital spokesperson told Brill, flatly, when asked about prices listed on a bill. “I’m not sure why you care.”
The justification for such as system seems to be that it allows hospitals to use a crazily inflated price as a starting point for negotiations with insurers—and also for patients who have no insurance. The argument is also made that hospitals want to be able to charge wealthy foreigners top dollar for services, with the idea that these easy profits will be used to help provide subsidized services for the poor.
The sad truth, detailed in the story by Brill, is this:
I quickly found that although every hospital has a chargemaster, officials treat it as if it were an eccentric uncle living in the attic. Whenever I asked, they deflected all conversation away from it. They even argued that it is irrelevant. I soon found that they have good reason to hope that outsiders pay no attention to the chargemaster or the process that produces it. For there seems to be no process, no rationale, behind the core document that is the basis for hundreds of billions of dollars in health care bills.
The new-car purchase is probably the most obvious, well-established example of how the “sticker price” isn’t a real price. Due to auto dealership incentives and rebates, leasing and financing deals, and old-fashioned haggling, virtually no one pays the price listed on a new vehicle.
Despite the fact that consumers hate that’s it’s a hassle just to get to a final price for a new car, the system persists because, well, it just always has. Most dealerships apparently think that it’s still in their best interests to operate this way, though some admit that the process is designed for idiots.
For decades, we’ve watched in horror as tuition and fees have soared at public and private colleges alike. Costs at state schools have increased by 40% or more overnight, while dozens of private universities have crossed over the $50K-per-year barrier.
At the same time that students and their families are instructed to freak out due to skyrocketing costs, they’re also told that it’s wise to ignore the numbers when navigating the college search. Why? Because relatively few students pay full price.
Studies have shown that thanks mostly to scholarships and financial aid private college students get a 33% discount, on average, off the full price of tuition. Many of the public and private institutions recently named as “Best Value” colleges made it to the list not because of low starting prices—but because the widespread availability of discounts brings costs down. Many students get 40% or 50% off the college list price, once grants, scholarships, and aid are factored in.
Think about how many easy ways shoppers can “save” on everyday purchases—store reward programs, online coupon codes, and old-fashioned weekly sales to name three. It seems as if every price tag must point out a “Compare to” or “Original” price to demonstrate the discount being offered, and every receipt must proudly tell the customer “How Much You Saved.”
First off, this has been pointed out by loads of personal finance wonks, but it bears repeating once more: When you’re spending money, you’re not saving money. That goes even when something is “on sale.”
Secondly, the ubiquity of markdowns and discounts via sales, loyalty programs, and such has brought to light something of an existential bargain-shopper conundrum: When everything is always “on sale,” what exactly is a sale? Do the terms “full price,” “original price,” “compare-to price,” and “manufacturer’s suggested retail price” mean much of anything? Do they have any relationship to genuinely good prices?
About a year ago, JCPenney CEO Ron Johnson came clean about how the store’s original prices were fake prices cooked up mainly to make the inevitable markdowns seem more impressive and tempting to shoppers. The strategy is known as “price anchoring,” and it’s standard practice at most stores. Johnson said that perhaps 1% of all JCPenney merchandise was sold at full price—the rest was bought “on sale.” The plan was to replace fake prices with a new, “fair and square” system that got rid of pricing games involving coupons and sales.
While the new system sounded great to many consumer advocates, it proved to be a failure with shoppers, and JCP scrapped the idea. The result is shoppers should expect “sales”—and artificially inflated “original” or “suggested retail” prices—to keep appearing at JCPenney and the majority of stores out there.