4 EXAMPLES OF HOW LIST PRICES ARE MEANINGLESS: LIST PRICE=FAKE PRICE

After reading this, I wondered why these practices were not ilegal. 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:

Health Care 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.

Cars 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.

College 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.

Retail 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.

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