A buyer’s Christmas

The Financial Page

By James Surowiecki

updated 12:01 p.m. ET Dec. 17, 2007

‘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.

MORE FROM THE NEW YORKER

The New Yorker Section Front

Wall Street’s public humiliation Equal in the eyes of greed That uncertain feeling The permission problem Does CNET fit with CBS? Toyota's open secret of success Regulations matter little without regulators Americans are going for broke Banks that are too dumb to fail What microloans miss The New Yorker Section Front