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Is it $20 or $600?

Thanks to friend and reader Karl Sakas for writing in about yesterday’s price signaling email.

Karl shared a story that comes from Payless, the discount shoe retailer. No, this isn’t becoming an email about the shoe business…just stick with me here.

Payless created a pop up store where they showcased their $20 shoes in a storefront that had the look of high-end fashion, and put huge price tags on the shoes – up to $600. Real people were invited into the store, and their reactions were recorded on camera.

Not surprisingly, many of them were fooled. Which tells us a few things:

  • People aren’t purely rational actors – it’s a myth. The average person can’t tell the difference between a budget and a luxury item, and that’s partly because the differences may not be as pronounced as we might assume. The story of the $10M Getty Kouros statue drives the point home that even experts can’t agree on what’s real antiquity, and what’s forged. How could a lay person spot a fake shoe?
  • Context is a huge factor in our perceptions. The Payless experiment is the same idea as any double blind intended to test context. All you have to do is use the same goods and change the environment (or packaging, or story, or…you get it) and suddenly they become more valuable in one context than another.
  • Luxury is both created and paid for. Is an $850 pair of pink Belanciaga clogs any better than a pair of Crocs for $60? Probably not. But a flight on a privately chartered plane has distinct and obvious benefits over flying commercial. Sometimes luxury is rational, other times it’s just a signal.
  • High prices create de facto scarcity and exclusivity. If something’s expensive, a smaller number of people can afford it. That exclusivity is certainly part of what’s paid for, and that’s the importance of brand when it comes to luxury goods or high-priced-anything (including consulting and services).

Payless filed for Chapter 22 bankruptcy in the last few weeks, this time for good. As with yesterday’s cautionary tale, competing on price simply left them with no margin for error. The combination of online competition, high real estate and corporate overhead, and a costly inventory mishap ultimately led to an unsustainable business model.

Still, they gave us a wonderful commercial: