Posts Tagged ‘shrouding’

Profitable pricing is literally “shrouded” in mystery…

July 20, 2012

A couple of years ago, behavioral economists Xavier Gabaix and  David Laibson wrote a seminal paper on the concept of “price shrouding,” and “information suppression”.

Here’s a summary excepted from The Red Tape Chronicles

The principle is simple, and shows why cheating is rampant in our markets and why honesty is rarely the best policy.

First, a definition of shrouding:

In days gone by, price tags were simple.

An apple cost 10 cents.  A cup of coffee cost $1.

But today, the consumer marketplace is far more complicated, giving sellers the opportunity to create confusion.

Many items have follow-up costs that make the original price tag meaningless.

Computer printers are the classic example.

You might get a great deal on a printer, but if the ink is expensive, you lose in the end.

In fact, Gabaix argues that it’s impossible for consumers to intelligently shop for printers.

No consumer knows how much ink costs — the cartridges don’t come in standard sizes, the amount of ink used to print varies and ink costs are unpredictable.

That makes the true price  “shrouded” — not quite hidden, but not quite clear, either

So, it’s easy for printer companies to lowball printer price tags and overcharge for ink, enabling them to print money.

Shrouded price tags are everywhere.

The hotel website might say “$99 a night” but you know the bill will be more like $120 or $130.

Pay TV companies promise $30-a-month service, which ends up costing more like $50.

At its best, the maddening mixture of coupons, rebates, sales and fine print fees can feel like a game.

At worst, it’s being cheated.

You’d think shoppers would love a chance to buy from a store that doesn’t play these games, the way car buyers (allegedly) like shopping at no-haggle auto dealerships.

They don’t.

Shoppers hunt for the tricks that let them save money.

Stores hide booby traps that let them take money.

If a firm tries to educate consumers on tricks and traps, and tries to offer an honest product, a funny thing happens: Consumers say, “Thank you for the tips,” and go back to the tricky companies, where they exploit the new knowledge to get cheaper prices, leaving the “honest” firm in the dust.

Once you educate consumers on the right way to shop, they will seek out the lowest cost store, and that will be the one with the shrouded prices.”

“Shrouding is the more profitable strategy.”

Like it or not, hidden fees – and secret discounts – are here to stay.

>> Latest Posts

%d bloggers like this: