Episode 633: The Birth And Death Of The Price Tag
JACOB GOLDSTEIN, HOST:
A while back, the CEO of Coca-Cola noticed something about the company's vending machines. We heard this story from a guy named Robert Phillips. He teaches at Columbia and has sent some consulting work for Coke. And Phillips says, the thing the CEO noticed was frankly pretty obvious.
ROBERT PHILLIPS: When the weather is hot, we sell a lot more Cokes through these machines. We actually run out a lot more, you know, so - and that's a bad thing. That's frustrating to consumers.
JESS JIANG, HOST:
The CEO figured this is an easy problem to solve; stick a thermometer on the machine, and on hot days, charge more.
GOLDSTEIN: He mentioned this in an interview with a Brazilian magazine. He said, you know, look, people value a Coke more when it's hot. So - and I'm quoting here - he said, "it is fair that it should be more expensive." It's fair.
JIANG: When people heard this, they did not think it was fair. They flipped out.
PHILLIPS: Particularly given the iconic status of Coca-Cola - of course, if it had been - I don't know - if it had been Shasta Cola, who cares?
PHILLIPS: But, you know, Coca-Cola, and it got lots of press.
JIANG: The press of course was not so good. One quote, "the latest evidence the world is going to hell in a handbasket."
GOLDSTEIN: Yea, that's the Philadelphia Inquirer. On "Good Morning America," Diane Sawyer asked, why does that feel so unfair? And I think my favorite is the San Francisco Chronicle, which called it a cynical ploy to exploit the thirst of faithful customers.
PHILLIPS: And so they backed off, and they never did it. And they abandoned the project.
GOLDSTEIN: People really don't like the idea that the price of a Coke could change as fast as the weather. You know, if a Coke costs a dollar in the morning, it should cost a dollar in the afternoon. That is the price.
JIANG: But this expectation that everything has a price tag is actually a fairly new way of looking at the world. And it might not last that much longer. The price tag might just be a blip. Hello, and welcome to PLANET MONEY. I'm Jess Jiang.
GOLDSTEIN: And I'm Jacob Goldstein. Today on the show, the birth and death of the price tag and what's coming next.
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JIANG: The whole world I've known is in this price-tag world. Everything has a price, one price.
GOLDSTEIN: But when you take the long view of the historical world, this price-tag world is like a bizarre aberration. You know, for almost all of the history of human commerce - for thousands of years - you walk into a store, and you point to something. And you say, how much does that cost? The guy at the store is going to say, how much you got? You know, everything was a negotiation. And there were good reasons the world was this way.
JIANG: Say I have a store and - I don't know - I'm selling eggs. And a guy walks in, and he looks like he has all day to haggle. And he's really been scouting out the best place to buy eggs. So I sell him a dozen eggs for a buck 50.
GOLDSTEIN: So then, a few minutes later, somebody else comes in. This guy's wearing fancy shoes, clearly does not have a lot of time to haggle. So you sell him eggs for twice as much. You sell him eggs for 3 bucks.
JIANG: Each customer pays what they think is a fair price. I make a profit. We all win.
GOLDSTEIN: This was just the way things were, and almost everybody accepted it, everybody except this one religious group, the Quakers. Robert Phillips, the consultant we talked about the Coke thing, he said the Quakers did this really fringy, radical thing.
PHILLIPS: They would have a fixed price. The Quaker would - the merchant would say what the price is, and that price would be the same for everybody.
GOLDSTEIN: That's it. Having one price for each item, that was the Quakers' radical thing. They thought haggling was just fundamentally unfair. They thought charging different people different prices for the same thing was morally wrong.
JIANG: You can imagine walking into a store and pointing to a dozen eggs and getting all fired up to do an egg haggle.
GOLDSTEIN: Let's go. Let's do this.
JIANG: And then your friend, like, kind of elbows you and says, no, no, this is a Quaker store.
GOLDSTEIN: No haggling. No haggling here.
JIANG: What are you doing?
GOLDSTEIN: Yeah, the Quakers were definitely, definitely in a real minority with this no-haggle thing.
JIANG: But as the modern economy got going in the 1800s and businesses starting getting bigger and bigger, haggle worlds got to be a hassle.
GOLDSTEIN: You know, if you are running a store, if you're working at a store, you need to know a lot to haggle. You need to know how much you paid for the stuff, how much your competitors are selling it for. You need to know how much different customers are willing to pay. Robert Phillips says you couldn't just hire some kid on summer vacation to come and sell stuff at your store.
PHILLIPS: Clerks usually had long apprenticeships before they could actually be allowed behind the counter. So they had to spend a couple of years learning the business.
PHILLIPS: Yeah, typically. Learning how to haggle before you would let them be left alone.
JIANG: Haggling is a pain for customers, too. Imagine you're at some store and there are five people in front of you in line. And you have to wait for them to all go through that haggling process before you can buy your shirts or whatever.
GOLDSTEIN: So finally around 1870, a few people decided to take a big risk. They decided to break with haggle world. They invented the price tag, this actual piece of paper stuck on each thing that tells you the price - not some starting offer subject to negotiation, but the price. And inventing the price tag was not just about fairness or what was morally right; it was about building really big stores.
PHILLIPS: Two stores here in New York, Macy's. And Macy was a Quaker. And he featured fixed prices. The most famous one was Wanamaker's in Philadelphia.
JIANG: Wanamaker and Macy's, they're building these new things, these department stores. And they're trying to hire all of these clerks, but they don't want to train them for years and have them become master hagglers. So the price tag solves this problem. It makes it easy for them to hire the clerks.
PHILLIPS: All they had to do was be essentially what clerks are today, you know, knowledgeable about the fabric. Oh, madam, this would look wonderful on you. They didn't have to do pricing. They didn't have to haggle. They didn't have to know the cost of items.
JIANG: Wanamaker becomes this kind of evangelist for the price tag. He says, look, the price tag, it means you, the customer, you don't have to arm wrestle with the clerk anymore when you buy things.
PHILLIPS: There's no longer a war between the seller and the buyer, which is what he called the higgling and the haggling. Everyone can come into Wanamaker's and know they will be treated the same.
JIANG: Customers loved it. The price tag spread. It was everywhere.
GOLDSTEIN: And this is the world we grew up in. You know, we grew up in price-tag world. So you buy whatever - you buy a bag of Doritos. And you know, printed there on the bag, there's the ingredients. There's corn and...
GOLDSTEIN: ...Salt - plenty of salt. And there, right next to the ingredients, printed on the bag is the price, $1.49.
JIANG: And it feels like the price is just a part of the thing. It's part of chips.
GOLDSTEIN: Yeah, the chips have salt and whatever - corn - and they cost $1.49. That is a fact in the world. That's the way price-tag world works.
JIANG: And the price-tag world has had a good, long run. It's been here for 150 years.
GOLDSTEIN: But now, as promised, it is time for...
JIANG: The death.
GOLDSTEIN: ...The death of the price tag. I mean, OK, that's totally overstating it. The price tag is not dead yet, but I will say the outlook for the price tag is grim.
JIANG: The death of the price tag, it started with airfares. So airlines used to be solidly in price-tag world. The federal government, it laid out the price of every flight. So it didn't matter when you booked - if you booked a week early or two months early - or what airline you flew, it was all the same price.
GOLDSTEIN: It was like a price tag carved in stone, until all of a sudden it wasn't. Right around 1980, Congress said airlines could charge whatever they wanted for tickets.
JIANG: We talked to a guy who was there. His name is Bob Cross, and he worked at Delta at the time.
GOLDSTEIN: What was the sense? What was it like at that moment inside the company?
BOB CROSS: Panic is probably the right thing. There was a lot of - a tremendous amount of angst.
GOLDSTEIN: Delta had built its business in this world where prices did not change. And now suddenly, they have to figure out how to sell millions of seats whose value is changing constantly. You know, it's not just how far you're flying or what airport are you flying to, it's what time of day is the flight and what season is it and is it a day before the flight or a month before the flight?
JIANG: Delta is clearly failing in this new system. They're losing hundreds of millions of dollars a year.
GOLDSTEIN: Bob Cross was new at the company at the time. He'd worked in all these other industries. And so the Delta execs said, all right, Bob, see if you can figure out how to solve our problem. So Bob starts going from office to office trying to figure out what's going on, trying to figure out what the problem is.
CROSS: So I'm walking around with my yellow legal pad, asking people, what do you do; how do you do what you do; what would you change if you could change anything? And I came across these 50 people who were literally in the basement of the reservations building. It was a dark room because they were all sitting at these old-school computer terminals. So they were black background with green letters. And they were tapping on keyboards that were just these old clickity-clackity (ph), you know, clickity-clackity (ph), clickity...
GOLDSTEIN: These 50 people sitting in this dark room, they are the ones in charge of setting the price for every seat on every Delta flight. Most of them were former reservation agents, the people you called when you wanted to buy a ticket. This right here, this room was the heart of the chaos at Delta. The people running Delta knew they were in this new world where prices could change all the time. But they didn't know how to deal with it. So they had these 50 people just sort of haphazardly changing prices around.
CROSS: So I would sit down with someone - I said, tell me what you do and how do you do it. And he pulled up a flight, and I remember it because it was a flight that I flew frequently between Atlanta and Washington, D.C. And he said, I'm going to show you this fight. And he said the flight departs two weeks from today. There's only a handful of seats sold on it. I'm going to have to offer more discount seats.
JIANG: Bob Cross knew that offering more discount seats, that was a huge mistake. He took this particular flight from Atlanta to D.C. - he took it all the time. He knew that it was full of lawyers and lobbyists and people who would book last-minute and were happy to pay full fare. So offering discount seats, that would cost Delta a lot of money.
CROSS: The full fare was probably around four- or five-hundred dollars at the time. The deep discount was probably $69.
JIANG: Whoa, that is a huge deal.
CROSS: Yeah, huge, huge difference. Yes, huge difference, and it was all very, very manual and very, very subjective. I would say, well, why do you do that? And he said, well, I'm just king of - I've been watching this flight and that's what I think.
JIANG: Wait. What were you thinking when you heard this?
CROSS: I'm thinking (laughter) you got to be kidding me. I'm thinking no wonder we're losing money.
GOLDSTEIN: So Bob convinces the people running Delta to change this. They invest millions of dollars. They buy computers, write software, crunch data. They figure out how to change their prices every day based on more than some guy's gut feeling. And it works. Bob pulls Delta out of chaos and into the post-price-tag world. The company starts making a profit again, and Bob is suddenly a hotshot, goes off, becomes a consultant, starts helping other companies figure out this new world.
JIANG: First it's hotel chains and rental car companies and cruise lines. And today prices change in this dynamic way everywhere. There's baseball games and consumer electronics and of course Amazon, right? Amazon has all these products where prices change all the time.
GOLDSTEIN: And buying stuff when you don't know what the price is going to be an hour from now or five minutes from now, this is really stressful.
JIANG: This is really hard on me. I recently bought an airline ticket, and I looked every day for two weeks at the price. And then finally, I just bought the ticket. And I still kept looking afterwards. I just couldn't - I just wanted to make sure I got a good deal.
GOLDSTEIN: Jess, Bob Cross is nothing like you. He is still out there pushing for everything to be like this, not just big things like airline tickets, but the little things we buy every single day.
CROSS: You know, I get bananas and look - oh, these things, they ought to be discounted, these bananas, because they only got a couple of days life left in them versus these other bananas that may have a week's life.
GOLDSTEIN: Yeah, why aren't brown bananas cheaper, damn it?
CROSS: (Laughter) There we go. That's what I think of every single day.
JIANG: Bob Cross is serious. He thinks grocery stores could be the new frontier where in front of every item, there's little digital screen and prices can change all the time.
GOLDSTEIN: But grocery stores in the real world have been trying this for years now - Wal-Mart, Target, Walgreens, Kroger, Safeway.
JIANG: So basically every retail store you can think of. They've all experimented with this, and they almost all have failed. And it's because people don't like this idea. It's unsettling to think that the price of my bananas will go up just as quickly as the airline ticket.
GOLDSTEIN: That would be a lot.
GOLDSTEIN: But just that they'll go up is - like, is more than we once worry about, right? And there is this broader sense, I think, that right now, you know, we're still trying to figure out the rules of this new pricing universe we're in. There is one thing the people clearly don't like, that clearly at least so far is against the rules. And that is when a company charges different customers different prices at the same moment. Amazon actually tried this with DVDs. This was back when people still bought DVDs. They tried this thing where just randomly different customers saw different prices. So, for example, I might see the DVD for, say, "Love Actually" listed on Amazon for 13 bucks, and, Jess, at the same moment, you might see it for 10 bucks.
JIANG: People figured out that Amazon was doing this, and they did not like this at all. And Amazon had to come out with this press release and say, we promise we'll stop doing this. It was a mistake.
GOLDSTEIN: Maybe everybody now has that sense of fairness that the Quakers had 200 years ago, that feeling that made them give everybody the same price.
JIANG: Maybe it's just because we all grew up in this world.
GOLDSTEIN: I've got a 3-year-old daughter and a 5-year-old daughter. You think when they grow up they won't even know what a price tag is?
CROSS: That's quite possible.
CROSS: Yeah. They may be as comfortable in that world as you are uncomfortable thinking about it.
GOLDSTEIN: Jess, when Bob said that when we interviewed him, I was actually surprised. But I've thought about it since then, and it makes sense to me now. I mean, I think fundamentally nothing about prices or price tags is, you know - is set. It's all just what you're used to.
JIANG: I don't know. To me, it still sounds pretty insane.
Send us your comments. Email us, firstname.lastname@example.org, or tweet at us @PlanetMoney.
GOLDSTEIN: Our episode today was produced by Nadia Wilson. If you're looking for something else to listen to, try Alt.Latino. It's a music show with everything from Mexican folk to electronica. You can find Alt.Latino at npr.org and on the NPR One app. I'm Jacob Goldstein.
JIANG: And I'm Jess Jiang. Thanks for listening.
(SOUNDBITE OF SONG, "FOR THE PRICE OF A CUP OF TEA")
BELLE AND SEBASTIAN: (Singing) For the price of a cup of tea, you'd get a line of coke. For the price of the night with me, you'd be the village joke. For the price of a pint of milk, I'll tell you all I know...
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