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Shrouding refers to the study within behavioral economics of how manipulating purchase prices and hiding extra costs from consumers can increase sales. These hidden costs, known as shrouded attributes, include the cost to re-equip, maintain, upgrade and/or repair an item. Some examples of shrouding include:
- Pricing a $2.00 item at $1.99 because the human mind tends to focus on the higher denomination (the dollar) than it does on the lower denomination. Another example of this is pricing gasoline at $3.99 and 9/10 cents per gallon rather than at $4.00 because people will see that price and tell themselves that the price is "three-ninety-nine."
- Pricing items 30 percent above the minimum profitable retail price, then offering 20 percent off coupons on a regular basis.
- Inflating product prices temporarily, then slashing prices back to the old rate and promoting this as a massive discount or price-drop.
- Offering a basic service such as a motel room or cable TV service for a seemingly low rate, then tacking on extra fees for extra services, which are usually mandatory. Common variants include the "cover charge", "table charge" and/or "service charge" added to restaurant bills in many countries, and budget airlines which promote flights at rock bottom prices, then add unusually high charges for check-in and baggage when the customer makes a booking.
- Loss leader pricing. For instance, if you sell an "economy" computer printer for 20 percent less than comparable printers, but equip it with thimble-sized printer cartridges that cost 20 percent more than comparable cartridges.
Naturally, shrouding works better than most retailers would like the general public to know. In 2012, the American department store chain J.C. Penney found out the hard just how well shrouding works. On 1 February of that year, Penney's eliminated coupons, cut prices and rounded all their prices up to whole dollars. The result? Shoppers complained, even though many of Penney's regular prices were nearly as low as their old coupon prices. In the first quarter of their new pricing policies, the company's sales fell nearly 25 percent as compared to the same quarter in 2011.
- ↑ Gabaix, Xavier, and David Laibson. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets", The Quarterly Journal of Economics (2006) 121 (2): 505-540.
- ↑ Hines, Alice. "J.C. Penney's Sales Plummet: How Couponing Moms Cost The Store $55 Million", Huffington Post website, posted 16-17 May 2012, accessed 25 May 2012.