Priceless: The Myth of Fair Value (and How to Take Advantage of It) (26 page)

The same goes for perfume, the liquor in bar drinks, and anything
that comes in a spray can. The situation is almost as bad with infrequently purchased durables. It’s hard for a consumer to know how well a refrigerator or water heater or fax machine will perform or how long it will last. We buy only a few in our lifetime, and each time, brands and models and features have changed. A conscientious consumer willing to pay a premium for green appliances is even more at a loss. A 2008 Consumer Electronics Association survey found that 89 percent of consumers planned to consider energy efficiency in choosing their next TV—while more than half confessed to being clueless about what energy efficiency labels mean.

Possibly the greatest ongoing con job of American capitalism is text messages. The so-called market price of a text message has nothing to do with bandwidth or any technological reality. It is determined by how much consumers (or their parents) can be persuaded to pay.

A text message is a very,
very
small package of bandwidth. It is limited to 160 characters, each requiring a byte. Compare that to a multimedia message (MMS) or e-mail, which can include pictures running into the megabytes. A Simon-Kucher & Partners survey found that consumers believed an MMS was worth 3.5 times as much as a text message. Measured by data, a typical MMS is about a million times bigger.

For cell phone users paying à la carte, the retail price of transmitted data is around $1 a megabyte. At that rate, the price of a 10-character message ought to be about about 1/1,000 of a cent. Rounded to the nearest cent: free.

Even the 1/1,000-cent figure arguably overstates the true cost of a text. Unlike e-mail, Internet, and voice data, text messages are piggybacked onto the cellular network. They occupy otherwise unused space in a control channel used for network maintenance. So as far as text messages are concerned, the cell phone companies are like the mean clique in high school who sold elevator passes (and there’s no elevator).

Given that consumers have little sense of what texts ought to cost, they take their cues from the phone companies. The text message business plan has been a huge success. From 2005 to 2008, the price American carriers charged for text messages doubled, from about 10 cents to 20 cents. In that time, the volume of text messages grew about tenfold.

The word “cheap” appears forty-five times on the CheapTickets home page (according to my browser’s text search, and not including three more times in the window title and URL display). I can personally testify to the hypnotic power of the CheapTickets trademark. Did I ever actually believe they have cheaper fares? Naw . . . uh,
maybe
?

Airlines were one of the first to pioneer differential pricing—charging different prices to different customers based on willingness to pay. Robert Crandall, formerly the CEO of American Airlines, once said, “If I have 2,000 customers on a given route and 400 different prices, I’m obviously short 1,600 prices.” The Internet was supposed to make things easier on the traveler by enabling quick, easy price comparisons. It hasn’t worked out that way, and a good example is CheapTickets. Its site doesn’t show fares for bargain airlines like Southwest or JetBlue. Since these airlines have a reputation for the lowest fares, the promise of “CheapTickets” rings hollow. You’re getting the cheapest fares—of the more expensive airlines?

It’s little wonder that many go directly to the Southwest or JetBlue sites. I just now checked fares for a trip from Los Angeles to Phoenix, one of Southwest’s busiest routes. The lowest round-trip on the Southwest site is $98 plus taxes and fees. On CheapTickets, United and US Airways offer the same trip for the same price, $98.

The bargain carriers’ fares truly are cheaper . . . except when they’re not. Sometimes they’re more expensive than the regular airlines’ lowest fares. Those more expensive fares are important to the bargain carriers’
bottom lines. Southwest and JetBlue are able to charge some higher fares, ironically, because they’ve forged a reputation for the lowest fares. Cheap is relative, and it depends on context. This is one important reason why Southwest and JetBlue aren’t on the major travel sites. They’d rather their customers didn’t compare.

Actually,
all
airlines feel that way. It’s a funny business: most discretionary travelers choose a flight based on price, period. (Imagine what the hotel business would be like if travelers refused to pay a penny more than Motel 6’s rates.) Airfare price sensitivity has led to the practice of
unbundling
: charging for checked luggage, pillows, meals, coffee, phone reservations, paper tickets, seat selection, and all the other amenities that used to be free. “Three or four years ago, airlines got fed up with their tickets being priced like bushels of wheat on a commodities exchange, so they set out a strategy for how to make prices less transparent,” said Rick Seaney, CEO of FareCompare.com. It was European carriers that pioneered unbundling. In the United States, it took hold with a vengeance in May 2008, when American Airlines started charging $15 for the first checked bag. Indignant travelers promptly vowed never to fly American again. That resolve didn’t last. It crumbled as other airlines added their own baggage fees and started charging for previously free amenities.

Consumers equate unbundling with nickel-and-diming and imagine that the fees are pure profit. That’s not really true, at least not on competitive routes. The real purpose of unbundling is the same as for bundling—to make it harder to compare prices. The tacked-on fees vary greatly. One airline will be cheapest for checked luggage, another has a good deal on pillows and soft drinks, and still another will let you make a phone reservation for free. There are now too many amenity charges to compare the true price of a trip without a spreadsheet (some websites help with this). But most travelers do as the airlines intend: they shrug off the fees and choose a flight based on something,
anything
, other than the lowest price.

“I’ll tell you what brilliance in advertising is,” Roger Sterling says on an episode of
Mad Men
. “99 cents.” Surveys assert that anywhere from 30 percent to 65 percent of all retail prices end in the digit 9. This holds through many orders of magnitude. Sometimes the 9 is thousands of dollars, sometimes it’s pennies, and in the case of gasoline, it’s tenths of a cent. Apple’s Steve Jobs was hailed as a genius for insisting on 99-cent pricing for the first iPod downloads ($1.99 for videos). In 2009 Apple relented only to the extent of adding prices of $0.69 and $1.29 for music.

The apotheosis of this phenomenon is the 99-cent store. In the 1960s, David Gold ran a liquor store in Los Angeles and wanted to get rid of some slow-moving cheap wine. He tried putting up a banner saying “Wine of the World. Your Choice: 99 Cents.” It worked; customers bought almost anything at the 99-cent price.

The funny thing was, the wine had previously been marked at prices ranging from 79 cents to $1.49. “The 79 cents sold better at 99, the 89 cents sold better at 99, and of course the $1.49 sold better at 99,” Gold said. The 99-cent effect was so amazing that Gold joked he ought to open a whole store selling merchandise at that price. The joke became reality in 1982, when Gold opened the first 99 Cents Only store. The chain now has about 277 stores and has inspired similarly named outlets (“knockoffs” is not quite the right word) from coast to coast. To anyone who failed to read the sign, the typical 99-cent store would be an enigma. It stocks ramen noodles, tube socks, playing cards, detergent, Halloween costumes, feminine hygiene products, tinsel, and marshmallows.
Nothing relates to anything else, and everything is vaguely suspect.

A 2008
New York Times
piece surveyed the flourishing state of 99-cent stores in New York (none of them affiliated with Gold’s 99 Cents Only chain). Frederick Douglass Boulevard, the busy commercial strip in Harlem, has the New Futa 99¢ Plus Store and the rival Bab’s 98-cent Plus Discount Store. The power of 9 spills over liberally. Signs promise merchandise for 99 cents, 98 cents, or a whole flurry of 9-ish prices. Brooklyn’s Ditmas Avenue boasts “59¢ 79¢ 99¢ and Up” and “69¢ 89¢ 99¢ & Up” stores.

Among the imitators, rules are hard to discern and ever-shifting. “The 99-cent promise is becoming more and more of an empty one,” concluded the
Times
. “The stores have fallen back on a bait-and-switch trick, luring customers with the sign, only to reveal, amid more expensive items, a grim 99-cent row of little-girl barrettes, shiny stickers and single rolls of toilet paper perhaps best suited for sanding furniture.”

It’s no secret that inflation is constantly assailing the business model. What was 99 cents in 1982 dollars would cost over $2 now. For the 99 Cents Only chain, the future arrived in 2008. After years of work-arounds like half-dozen cartons of eggs and ever-shrinking containers of milk, it bit the bullet and raised its top price to $99.99. For president Jeff Gold, it was almost like a death in the family. “The number 99 is a magic number—deviating from that is something we absolutely are not taking lightly,” he said. “I find significant discomfort emotionally about considering making the change.”

A price that is a little below a round number is known as a “charm price.” That usually means a price ending in 9 or 99, but 98 and 95 are considered charm prices too. No one knows when, where, or why the practice began. One theory mentions British coinage. Up until the Civil War, American pennies were scarce, and British shillings and sixpence circulated in the United States. New York stores often quoted prices in both British and American money. The conversion from shillings usually produced an odd number of pennies. According to legend, odd-penny prices became associated with British imports, which were considered superior to American goods. Shrewd shopkeepers began putting odd-number prices on domestic goods to lend a touch of anglophile class.

A marginally more believable story credits the cash register. James Ritty, a Dayton saloon keeper, invented the first cash register in 1879. Ritty knew it was almost impossible to check a saloon’s liquid inventory against cash receipts and suspected the worst of his bartenders. He therefore created a machine requiring employees to punch in a price in order to open the change drawer. When the employees did so, a bell rang to alert the owner. An owner could expect to hear steady ringing during the lunch hour and could investigate a suspicious lull. Ritty’s machine also kept a record of the amounts entered, and it was relatively simple to check the record against the cash. Macy’s was one of the first big stores to adopt cash registers. Since Macy’s prices were often even dollar amounts, they began using odd-numbered prices to compel employees to punch in prices and make change. Indeed, as shown on page 187, Macy’s ads from the 1880s show charm prices.

Neither the British money nor the cash register tale truly accounts for the magic number 9. A shilling was valued at 1/8 of a dollar, resulting in prices like 12 1/2 cents, 25 cents, 37 1/2 cents . . . none of them ending in 9. As far as the cash register explanation goes, any price that’s not an even dollar amount would require making change.

However they started, charm prices are widely used, not just in America, not just by marketing pros, and not just for cheap things. Prices ending in 9 are omnipresent on eBay, and FSBO listings price three-bedroom colonials at $599,000. Other than real estate, the most expensive charm price I came across was for a diamond-encrusted watch in Louis Vuitton’s Rodeo Drive store: $149,000. Do they really think it sells better at that price rather than $150,000? (It was the most expensive and prominent bauble in a wall display. Oddly, the cheaper LV watches—one a mere $7,450—were not charm priced.)

In addition to prices ending in 9 (plus zeros), there are prices with a nonzero digit to the right of the 9: $197,000 or $3.95. Prices like the latter are a pet peeve for restaurant consultant Brandon O’Dell. “They could be pricing at $3.99,” he said. “There’s absolutely no difference in value for the consumer, but it’s four cents.” In the restaurant business, four cents an order adds up.

Charm prices are now so identified with fast food that they are the stuff of self-satirizing marketing campaigns. In 2008 Taco Bell president Greg Creed wrote an open letter to rapper 50 Cent, asking him to change his name to “79 Cent,” “89 Cent,” or “99 Cent” to promote the chain’s low prices. The rapper responded with a lawsuit for the uncharming figure of $4 million—resulting in ample free publicity for both parties.

A Macy’s ad from the November 2, 1890,
New York Times
. About 60 percent of the prices end in 9.