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Christoph Niemann
By
updated 12/17/2007 12:01:42 PM ET 2007-12-17T17:01:42
The Financial Page

‘Tis the season to buy. Of course, for Americans it’s always the season to buy, but there is something special about the spending frenzy we engage in at holiday time.

The Christmas shopping season can account for as much as 40 percent of a retail store’s annual revenue and as much as three-quarters of its annual profit. So you might think that this would be a great time of year to be in the retail business. Instead, it’s a desperate one.

The markdowns that are supposed to come after Christmas have already begun. Internet mailboxes are flooded with offers of free shipping and huge discounts. Sales forecasts are gloomy, and weaker players have been weeded out — CompUSA has said that it will be closing in January.

Much of this, certainly, is due to anxieties over the slowing economy and its effect on consumer spending; according to one recent study, foot traffic at retail stores fell in seven of the first eight months of the year. But it also reflects something bigger: The steady erosion of retailers’ power. Americans are still the world’s greatest consumers — they shell out $4 trillion a year in retail spending — but it’s surprisingly hard to make a lot of money selling them stuff.

That’s not for lack of effort or ingenuity. Stores have poured time and money into devising tactics to pry open shoppers’ wallets, and all these tactics are on display this season. They rest largely on a simple insight: because how much we want something and how much we’re willing to spend on it is often a matter of context, successful selling is about controlling the context in which people shop.

Stores run “doorbuster” sales on the day after Thanksgiving, offering huge markdowns for a few hours, or “one-day sales” every day, because fostering a sense of time pressure, however artificial, makes shoppers more willing to buy. Economists have found that shoppers try to establish a “reference price” for a product by looking to outside cues like list prices, so Christmas circulars include manufacturers’ “suggested retail prices” along with the stores’ “discounted” prices, making everything look like a bargain.

Even the sheer profusion of products available represents a strategic choice. In an experiment in the early 1990s, people were first asked whether they preferred a $110 microwave oven made by Emerson or a $180 oven made by Panasonic. Only 43 percent chose the Panasonic. But when a higher-priced Panasonic model, costing $200, was introduced into the mix, people’s choices changed in a curious way: Suddenly, 60 percent wanted the $180 oven. Just adding a more expensive model made the medium-priced version look more attractive and boosted Panasonic’s total sales. Change what surrounds a product, in other words, and you can change what people think of it.

Retailers are undeniably good at the tricks of their trade. So why has retailing gotten so hard? In part, it’s because of imitation: When one store hits on a useful gimmick, competitors copy it. But it’s the Internet that’s made the biggest difference, albeit not in the ways we often think. People once believed that the Net was going to transform where we shopped — that it was going to make physical stores obsolete. It hasn’t: Even today, online sales are roughly 3 percent of total retail sales in the U.S.

What it has changed is how we shop, for a simple reason: It has created informed shoppers. In the past, retailers could make profits from what economists call “information asymmetry”: Sellers knew much more about prices, quality, and value than consumers did, in large part because good information for consumers was either hard to obtain or just not available at all.

Today, it’s easy to research and comparison-shop, and most consumers do it for at least some of their purchases. A recent study by Accenture found that two-thirds of those surveyed compared products online; a similar study, by the Consumer Electronics Association and Yahoo, found that more than three-quarters of electronics purchases are researched online but actually occur in conventional stores. And the amount of time people are spending on their research is far from trivial: 15 hours for televisions, 12 for digital cameras, and so on.

The results of this shift are obvious. First, consumers know a lot more about prices than they once did. That makes it next to impossible for retailers to charge significantly more than their competitors, and makes discounting seem less impressive — if everyone’s offering 30 percent off, 30 percent off stops looking like a bargain and becomes the reference price. It’s harder to create a sense of urgency around short-term sales, since it’s clear that if you don’t buy today you’ll be offered a similar price somewhere else tomorrow. And the wealth of online product reviews and commentary has made the cues that stores use to shape shoppers’ perception of quality and value far less effective.

This doesn’t mean that consumers are impervious to retailers’ tricks, and plenty of us shop the way Homer Simpson orders wine: buy the second-least-expensive thing on the list. And one obvious example of consumer irrationality continues to work in stores’ favor; namely, the Christmas shopping season itself. It’s not surprising that, as traditional tactics have become less useful, retailers have responded by making the holiday season weeks longer than it used to be.

Still, there’s no disguising the fact that power has shifted from sellers to shoppers. And that’s left retailers in a strange position: Soon the only hope of turning a profit will be to offer good value for money. What a radical concept!

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