After two decades of industry disruption, Amazon is a retail juggernaut, continuing to shake up rivals online and off as it builds a formidable fulfillment and delivery network, a huge and sticky Prime membership base, a strong Marketplace of third-party sellers and the flexibility to aggressively compete on price thanks to the patience of its investor base and the financial support of its cloud services unit.
From its 1994 inception on, Amazon has typically underlined its low prices by contrasting them against manufacturers’ suggested retail prices (MSRPs, also known by a slew of other names, including “list prices” and “reference prices”). Listing MSRPs—prices that in practice are rarely ever really charged—is traditionally a powerful sales tactic that has proven useful in retail enterprises from brick-and-mortar stores to television infomercials.
But Amazon's recent move to quietly eschew MSRPs has some onlookers questioning its dedication to its signature price competitiveness.
“The experience, where you show a few prices, is called ‘is/was pricing.’ It is this price, it was that price,” said Jason Goldberg, who leads commerce and content strategy at interactive digital agency Razorfish. "That’s a powerful psychological feature, because it automatically makes you feel like you got a good deal. Showing a second-tier price helps all retailers, and Amazon historically has been no exception. Now they’re eliminating the list price on a bunch of their listings—and none of us knows why that is.”
The MSRP psychology
Retailers use “is/was” pricing because of the powerful psychological effect Goldberg cites—that brimming sense of satisfaction that comes from “getting a deal.” Some 40 years of research into this area has found that many consumers feel good about “is/was” prices even when they know the “original” prices were never charged by any retail outlet, says Larry Compeau, professor of consumer and organizational studies at Clarkson University, who conducted many such studies.
“Basic fundamental psychological research has found that consumers do respond to these reference prices. They increase consumers’ perceptions of the value of the deal,” Compeau told Retail Dive. “And these results stand even when they don’t really believe that reference price. It still has an effect. We don’t know the underlying psychological processes in the mind, but we do know that reference prices do work well.”
MSRP listings have many critics, however. “It’s debatable whether it’s ‘deceptive’ or not, but I think the word I’d prefer to use is ‘manipulative,’” Robert M. Schindler, professor of marketing at Rutgers University business school and author of “Pricing Strategies: A Marketing Approach,” told Retail Dive.
Moreover, regulators and courts don’t like it when retailers take the practice too far, because they do consider it deceptive in a legal sense. Just ask e-retailer Overstock, which in 2014 took a $6.8 million hit over such consumer discontent, when a judge ruled its “is/was” listings amounted to “false and misleading prices" of products, a case brought by district attorneys in eight California counties in which Compeau provided expert testimony on behalf of the plaintiffs.
Yet change can be hard. Former J.C. Penney CEO Ron Johnson was famously criticized for his moves to do away with the practice. “What haunts J.C. Penney? A strategic mistake made close to two years ago, regarding its pricing strategy—replacement of sales through coupons with everyday low prices,” business strategist Panos Mourdoukoutas wrote in Forbes in 2013, following Johnson's ouster. “The old policy has been working well for retailers, because it hypes consumer emotions, making them feel smart and encouraging them to talk with other consumers about it. That’s how hype and buzz begins.”
Ironically, a class-action lawsuit filed against J.C. Penney in mid-2015—two years removed from Johnson's tenure—accused the retailer of misleading shoppers with most, if not all, of its price tags. Penney's not alone: A 44-week survey last year by nonprofit consumer authority Checkbook.org probing national retailers including Best Buy, Costco, Home Depot, Kohl's, Macy's, Sears and Target found that many items listed as "on sale" rarely, if ever, sold at any other "regular" price.
While some of the stores conducted valid sales on selected merchandise, Checkbook executive editor Kevin Brasler called some of the pricing policies “disturbing."
"What you need to know is that in many stores, the sales just never end, or hardly ever end," Brasler told KOMO News. "The worst offenders, for sure, were Sears, Kohl's and for many of the items we tracked prices on, Macy's." Indeed, T.J. Maxx is facing a suit alleging its “compare to” prices are a product of its staff’s imaginations, and Kohl’s is similarly accused of never charging what it puts on its tags.
While the number of such lawsuits has increased in recent years (“most of them coming from consumers who feel like they were taken advantage of,” said Compeau), pricing practices likely won’t change unless government agencies take action—or the sellers themselves rethink their approach.
“Unless they change the marketplace mentality of sellers, and take them back to a time when sales were really sales, it’ll continue,” Compeau said. And that would require more retailers following Amazon's lead.
Why Amazon is forgoing MSRPs
While Amazon didn’t respond to numerous requests by Retail Dive to expound on the move away from MSRPs, there's some speculation that the company is so comfortable with its power (by some estimates, its huge and growing Prime membership base now includes a whopping half of all U.S. households) that it will soon begin raising prices.
Goldberg is doubtful. “Amazon already has a bunch of other prices on its site,” he said. “Actually you generally see items being offered by 10 or 20 vendors, so Amazon already has this price competition clearly visible on the page. Those Marketplace sellers are essentially bidding for the lowest price, or the ‘fast follower’ price. [Amazon founder and CEO] Jeff Bezos’s flywheel strategy is to offer a low price, and get more consumers, more sellers and more competition in a virtuous circle.”
Some of the experts interviewed by Retail Dive for this story instead believe that Amazon's removal of some list prices instead may be a result of wariness over the spike in consumer lawsuits, and that the company is cleaning up its original price listings as a result. But all agree Amazon is most deeply interested in fostering a superior shopping experience for the millions of people who visit its site.
"What we’ve heard about the communication to some of our sellers is that the MSRP has been abused," said Scot Wingo, founder and executive chairman of e-commerce firm ChannelAdvisor, which works with a range of Amazon Marketplace third-party vendors. "Amazon’s argument is that that’s a bad customer experience."
Keep in mind, Amazon hasn’t completely done away with MSRPs. But Schindler says that decision too may be customer-centric, considering that MSRPs can help consumers comparison-shop.
“I would say that an online retailer should show the discounted and the MSRP list prices to help the consumer determine what the product really is,” Schindler said. “That’s the downside of online retail—you’re looking at a picture. If we know that the MSRP is $20, then it’s ‘the $20 size,’ and that helps you know what it is. Without that, you might not know exactly what’s being offered. I would say 'Use the MSRP when they help the consumer identify the product.' And therefore they must be true MSRP. In fact sometimes packages will have a little price right on them.”
Indeed, some Amazon sellers working with ChannelAdvisor have objected to the new policy because they sell close-outs of merchandise at prices that really are well below the original asking price, Wingo said.
"Their argument is that they’re outstanding citizens and the benefit to the consumer is that it does help to know the deal that they’re getting," Wingo told Retail Dive. "And it drives scarcity. When people can get a hot brand at 50% off, they will act faster. But Amazon’s North Star is the consumer, not the seller. If there’s a collision of the two things, they'll choose the consumer."
Ultimately, experts say, Amazon is much more interested in building an appealing, consumer-oriented marketplace where prices are low (or at least low enough), where the products are of good quality, and the service is trustworthy. Amazon Prime members (or other Amazon shoppers) may be willing to pay a bit more knowing they can have it delivered swiftly for free and that they’ll get strong customer support if they’re not satisfied. In short, Amazon is intent on developing Prime to the point it would be "irresponsible not to be a member,” as Bezos wrote this spring in his annual letter to shareholders.
“If they’re relentlessly lowering prices, it’s going to be a consumer thing that’s driving it,” Wingo said. “If you spend time with executives and employees, you see it’s part of the customer culture there. Everyone talks about the customer, but I’ve never seen anyone walk the walk like Amazon does.”