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Discount Dangers

Ellen Ruppel Shell on why paying less costs more

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Ellen Ruppel Shell says that with the country's discount culture, we have these low prices, but we’re out of work, and Americans are sick of it.

The most popular travel destination in the United States is the outlet mall. Discount stores attract more visitors than Times Square, Disney World, and the Grand Canyon combined. What’s wrong with that? Plenty, says Ellen Ruppel Shell, a College of Communication professor of journalism.

In her new book, Cheap: The High Cost of Discount Culture (Penguin Press HC, 2009), Shell argues that America’s obsession with getting more for less has made us a country with less wealth, less manufacturing — and much less community.

BU Today spoke with Shell about life in discount heaven.

BU Today: What is the discount culture we live in?
Shell:
Since the beginning of written history, we have sought out bargains. The difference now is that in ancient times, the bazaar was a great haggling ground and we were haggling with someone from our community with mutual interests. If you cheated someone, you paid for it later by either losing his business or losing the business of his relatives. Your reputation was extremely important. Today we are all sort of tourists. We don’t know the provenance of the product we’re buying, let alone the person who made it. We don’t even know what country it came from.

When did our descent into discount culture really begin?
It’s been a gradual thing. There were discounters in the late 1800s and early 1900s. John Wanamaker, founder of the huge department store in Philadelphia, is credited with inventing or at least making popular the idea of the price tag. That was a major step in strategic pricing, because if you have a price tag and you have a fixed price, then you can lower the price and show a discount. But Wanamaker was a good guy, a religious guy who wanted to make his products as affordable as possible. He wanted to do right by his customers and right by his workers.

Woolworth, a contemporary of Wanamaker, had a different idea. His idea was to sell things as cheaply as possible by lowering the cost of labor and de-skilling labor. Woolworth clerks were not skilled. They tended to be women living at home with their parents and making $2 to $3 a week. He kept them poor, quite deliberately, while he was extremely rich. After the Great Depression, people became suspicious of discounters. They called them gutter merchants and worse.

Did they believe that discount stores contributed to the 1929 crash?
Not contributed, but with very high unemployment rates, it became easier to pay very low wages, and people associated low wages with cheap goods. Cheap goods meant cheap. People were very concerned about that, and there was legislation passed to prevent price-cutting. The public was worried about chain stores, about the de-skilling of retail and the homogenization of retail. There was a real hue and cry.

What did they object to about homogenization?
People believed in craftsmanship. There was also a real concern that this was going to affect merchants who were keystones in the community, and it did. People worried about the centralization of power and wealth outside of the community.

If people were so worried about it, how did it come to dominate our culture?
After World War II, our economy boomed and the anti–chain store, anti-discount push subsided. The laws were ignored and then overturned; unfettered free markets and the race to the bottom began. Then in the 1970s, with the consolidation of department stores and the rise of global technology, it all accelerated. So consumer prices have gone down, down, down.

OK, so here we are with lots of low prices and cheap goods, and people like to buy the stuff. What’s the problem?
Let’s start with the way it works on the psychological level. We have two processes in the brain, as Freud would postulate it. The first is the impulsive, childlike side, and the second is more considered, cognitive. There are legions of MIT Ph.D.s who work on the science of markdowns and the mathematics of markdowns. They work with psychologists to find ways to stimulate us to react.

How do they do that?
They say, “This sale is only for the next two days!” Or they do it with shrouding. They hide the true cost, the long-term cost of the purchase. Or by reference pricing; they set a price, the manufacturer’s retail price that is much higher than the discount price, when in fact the real price is the discount price.

So they’re clever. Were retailers at one point more honest than they are today?
I can’t say they were more honest, but it has all become systematized and people who work in this arena have turned it into a science. They have found ways to stimulate impulse buying, to stimulate our emotional response.

What’s wrong with emotional response?
I’m not going to say whether it’s good or bad. I’m saying that much more than we realize, we buy for emotional reasons, and that can lead to bad decisions. In the case of discount purchases, what often happens is that the biggest thrill we get is when we make the purchase, but that thrill diminishes quickly. You bring the thing home and wonder why you bought it. Then we try to rationalize the purchase. And often we try to hide it, so we’ll take that thing that isn’t so good and throw it in the back of the closet.

We also tend to buffer the effect of purchasing, or regret, by using credit cards or buying on time, no money down. Whenever we make a purchase, we have positive and negative feelings. The positive feeling is, we’re getting something. The negative feeling is, we’re parting with money. But if you use a credit card or if it’s no money down, the regret goes way down and the pleasure of the transaction becomes unopposed. Discount shopping tends to result in a lot more purchases than one thought one would make walking into a store. We spend about 80 percent more in discount outlets than we do when we go to our regional mall. And when we go into the discount store we think we’re going to spend less.

There are all sorts of prompts that will get you to buy. One of them is shopping carts, which they have in discount stores, but not in traditional department stores. On average you’ll buy one extra garment if you have a shopping cart. Another is reference price. You’re much more likely to buy something with a very high reference price, so if the sweater said it was worth 150 bucks and it’s now 50 bucks, you’re much more likely to buy it than if it was priced for 50 bucks.

Is there a product we are more willing to pay a higher price for regardless of value?
Cars. Only recently has price become a paramount consideration. That’s because there’s also a big status factor, and when you’re talking about status products versus commodity, it gets more complicated.

Tell us about what this discount culture has cost us. In what subtle ways do we pay for it?
By driving down the prices of consumer goods, we are putting our consumer side first and our business side second. So the prices of consumer goods have plummeted in 30 years, but at the same time, health care and health insurance have gone way up. Child care, which in the 1970s wasn’t really an issue, has gone up astronomically. Fixed costs have gone up as our discretionary costs, or what we call our elastic costs, have gone down. Things we can control have gotten cheaper, and things we can’t control have gotten more expensive. At the same time, there is an absolute imperative for American culture that we keep costs down. To do that, we have to keep wages and benefits down.

Take a look at a company like Caterpillar, which can’t pay people what it used to pay them. Caterpillar, an iconic American company, first went South to nonunion states. When that wasn’t enough, they strong-armed the unions to cut wages and benefits in half. It’s now a company where the dads were making $40 an hour in wages and benefits, and their sons are making $22. As one guy said, “I make earth-moving equipment. It digs foundations for homes, but I can’t afford a house.” So guess what? The demand for that earth-moving equipment has gone down. And now Caterpillar is in serious trouble.

Can we find a way out of the discount culture?
Americans are getting sick of it. We have these low prices, but we’re out of work.

Are we really capable of changing our buying habits?
We can do it by being conscious, not buying impulsively, walking away from the deal and thinking about it, even not using a shopping cart. Those kinds of things save money. If we start using reason rather than emotions when we buy, I think that we’ll be a lot happier with our purchases. So it’s not just a bleeding heart argument. It’s also enjoying what we purchase, and instead of renting what we buy, truly owning what we buy.

Art Jahnke can be reached at jahnke@bu.edu.

4 Comments

4 Comments on Discount Dangers

  • Anonymous on 07.14.2009 at 11:18 am

    This is ridiculous!

    The savings and jobs created by retail far exceeds the losses caused by inefficient mom and pop stores going out of business! Any economist will tell you that.

    VR

    PS You don’t have to be a discount store to have a “sale!”

  • jgo on 07.14.2009 at 2:38 pm

    PPI lags CPI and cheap trash in stores

    Except that consumer prices have not "gone down, down, down". They’ve been increasing faster than producer prices. 
    But, yes, "cheap" is not the same as "inexpensive", so we’ve been seeing increasing proportions of over-priced cheap trash in retail outlets.

  • Anonymous on 07.14.2009 at 2:52 pm

    a response to "this is ridiculous"

    don’t be daft; spurious “efficiency” is the very thing in question here! wal-mart might seem more “efficient” in the sense of one stop shopping that replaces the local hardware through music stores but at what cost? by paying shite wages and withholding insurance benefits, their employees end up being supported through taxpayer funded programs like medicare. besides those “inefficient” mom & pop places bring intangible benefits to communities that shouldn’t have to be rehearsed here for those who know. pity on the commentator who clearly knows not of this nor of “true-cost” economics.

  • Taylor Hill on 07.15.2009 at 1:19 pm

    Point-Counter Point

    I’d be interested to hear an economics professor give his/her two cents on these observations.

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