By TIM ARANGO
In one of the many smoky scenes in “Mad Men,” the critically loved cable show about Madison Avenue in the era of martinis and misogyny, a founder of the celluloid advertising firm Rogers & Sterling describes marketing glory.
“I’ll tell you what brilliance in advertising is,” says the actor John Slattery in the character of Roger Sterling. “99 cents.”
It may be just the insight the nation’s retailers are looking for as they struggle to stimulate consumer spending in this trying time: If you can’t sell something for 99 cents, you should at least tack on .99 to the price.
Steven P. Jobs, the chief executive of Apple Computer, tried the 99-cent approach and arguably saved the music industry from oblivion.
In picking that one standard price for each song for sale on iTunes, Mr. Jobs built a commercially viable digital delivery business for music. Before the start of iTunes in 2003, it was an iffy proposition that people would ever pay for music online when they could steal it from any number of peer-to-peer networks.
Dave Gold also tried it. In the 1960s, he and his wife owned a liquor store in Southern California where they sold wine at various prices: 79 cents, 89 cents, 99 cents and $1.49.
“We always noticed that the 99 cents sold much better,” he recalled in an interview.
They priced all their wine at 99 cents, and overall sales improved.
“The 79 cents sold better at 99, the 89 cents sold better at 99, and of course the $1.49 sold better at 99,” he said.
Mr. Gold’s experience might suggest caution as iTunes prepares to sell songs in April at varying prices — a move that some academics say could complicate matters for consumers and cut into sales.
“It adds a level of complexity to the purchase of music,” said John T. Gourville, a professor at Harvard Business School who has studied what is known as psychological pricing. “Research has shown that when you add complexity to decision making, some people opt not to choose anything,” he said.
Mr. Gold and his wife eventually took the concept to the extreme and in 1982 started a chain of 99 Cents Only stores. They took it public in 1996, and today the company has 282 stores and is worth more than half a billion dollars. In the last quarter, sales were up 8 percent; profits, 31 percent.
Mr. Gold wasn’t the first to strike on 99 cents as a lucrative marketing gimmick, but he may have done the most with it. No one quite knows who came up with the concept.
It could have been Rowland H. Macy, who in this newspaper in 1880 advertised 100 pieces of “reliable black silk” for 99 cents. That’s the first instance of a newspaper advertisement featuring a price of 99 cents — at least the first one that one academic who did some digging on the subject could find.
Then there is this explanation: that the advent of the cash register, invented in 1879 by a Dayton bar owner (according to the Museum of American Heritage), allowed merchants to thwart pilfering clerks by charging a penny less then a full dollar amount, thereby forcing cashiers to open the register to give change to a customer.
Regardless, the marketplace power of .99 seems undeniable. But why?
Academics have offered a variety of psychological explanations. One study, by Robert M. Schindler, a professor of marketing at the Rutgers School of Business, found that consumers “perceive a 9-ending price as a round-number price with a small amount given back.” Researchers have also found that prices ending in .99 communicate “low price” to consumers.
At the University of Chicago, for instance, researchers found that when the price of margarine dropped from 89 cents to 71 cents at a local grocery chain, sales improved 65 percent, but that when the price fell to 69 cents, sales rose 222 percent, according to Kenneth Wisniewski, an author of the study.
And Professor Schindler, in a study at a women’s clothing retailer, found that the one-penny difference between prices ending in .99 and .00 had “a considerable effect on sales,” according to his study, with items whose prices ended at .99 outselling those ending at .00.
All of those findings may help explain why the new prices that iTunes plans to charge all end in nine: 69 cents for less popular songs, and $1.29 for current hits.
So when retailers price their wares with a figure ending in 9, the reason is simple, Professor Schindler said.
“It’s to make the price seem like it’s less.”
When Kishore Biyani tried a “clean Italian look” of glass and minimalist lines in one of his Big Bazaar stores, he was surprised by the effect on his customers – it drove them away. The sleek section of the store remained empty while the rest of the shop bustled.
Mr Biyani, head of the Future Group, India’s largest retailer, realised the decor was intimidating and alienating the middle-class Indian consumers who were more used to crowded bazaars and shops.
“You need hustle and bustle,” says Mr Biyani. “The Indian model of shopping is theatrical. There is buzz and haggling. If you have wide aisles you have a problem.”
Why crowded neighbourhood shops still enjoy the upper hand
Big, modern stores are not guaranteed victory in India’s retail revolution. Tiny, crowded hole-in-the-wall neighbourhood shops do have advantages over their “organised retail” counterparts. Small shopkeepers often know their customer personally, offer free home delivery, let customers order by phone and keep a tab.
“I had a grocer in Mumbai. I never saw him but the service was fabulous,” says Anirudha Mukhedkar, chief executive of Restore Solutions, a retail consultancy in Bangalore. “I ordered over the phone and I would pay him at the end of the month. He didn’t have to have a large store.”
Indian customers traditionally favour personal service and “not a cold-blooded transaction”. Retailers in India should think about “how to personalise and bring a degree of warmth to the transaction”, says Mr Mukhedkar. “If retail wants to get its act right, it needs to go back to basics.”
Kishore Biyani, chief executive of Future Group, India’s largest retailer, also retains some of the basics of shopping in India. Mr Biyani is known for creating the atmosphere of an open-air bazaar in his sprawling hypermarkets. His Big Bazaar stores have narrow aisles, overflowing bins and loud music.
“In India, theatre is always there in selling,” says Mr Biyani.
Mr Biyani’s Big Bazaar “hypermarket” stores, which are India’s closest equivalent to Wal-Mart, are clean, air-conditioned and well lit. But they have deliberately narrow aisles and overflowing display bins that simulate the feel of open-air markets common in India.
Drama and theatre are important elements in Mr Biyani’s stores, which also include the Pantaloons and Food Bazaar chains. At one store in a Mumbai shopping mall, dance music popular in Indian nightclubs blasts from loudspeakers while customers jostle to reach the best goods.
Modern retail stores are relatively new to India, so Mr Biyani and other retailers are having to adapt to the evolving shopping habits of Indians. The biggest mistake that retailers make is thinking that “just because you have set something up people will come”, says Anirudha Mukhedkar, chief executive of Restore Solutions, a retail consultancy in Bangalore.
Shopping in so-called organised stores accounts for only 4 per cent of India’s $322bn (€229bn, £218bn) retail industry but this share is expected to grow to 22 per cent of $427bn by 2010, according to the Federation of Indian Chambers of Commerce and Industry.
Unlike their struggling counterparts in the west, India’s retailers are looking at an attractive growth market. But getting it right will be tricky, given the country’s diverse population and distinct regional cultures.
Understanding India’s wide diversity – socio-economic, religious, regional and linguistic – is key to that strategy. “When you say Indian consumers, there are at least 10 Indias,” says Mr Mukhedkar.
Cultural preferences vary widely between regions. For example, types of rice and how people buy it differs in the north and south, says Harminder Sahni, managing director of Technopak, a retail consultancy based in Delhi.
In the north, rice might be sold in open sacks so consumers can inspect the goods. But in some parts of the south, rice is a common staple sold in sealed packets.
Store lay-outs will also vary according to region. In big groceries in Kolkata, eastern India, and other coastal cities, fish is a staple sold in the vegetable section, whereas it is categorised with meat in inland areas.
Because of these distinct regional tastes, retailers “don’t look at India as India”, says Mr Sahni. “They pick a region or market or city...The first two years might be in one city.” He says that most do not have ambitions to open pan-Indian stores: “Many start in one part of India and just stick to that.”
The Future Group has found another way of capitalising on regional variations: it has 72 annual promotions linked to local festivals. The company says the Big Bazaar store in Bhubaneswar, capital of the backwater eastern state of Orissa, took the group record for a single day’s turnover after promoting a sale linked to a festival.
William Bissell, managing director of Fabindia, a chain of upscale boutiques that sells clothing and housewares, says “every store has to offer a different mix. That’s why retailing in India is so complicated”.
Mr Bissell notes that Fabindia, founded in 1960, has an inventory of 200,000 items to cater to consumer tastes that vary dramatically across regions. “Any retailer will say that is crazy,” says Mr Bissell. To manage its enormous inventory, Fabindia has installed an IT system to track the flow of goods at nearly 100 stores in India.
Capacious western-style malls are also cropping up, especially for luxury goods. But when catering to the mass consumer, “it makes sense to have smaller stores with more workers”, says Mr Mukhedkar of Restore Solutions.
He points out that India’s cities command some of the highest real estate prices in the world but labour costs are among the lowest. Packed shelves are also preferable to give the consumer a sense of abundance and choice. “If a shelf can take 50 things, try to fit in 75,” Mr Mukhedkar advises. “Density per square foot has to be as high as possible.”
For practical reasons, Mr Bissell favours smaller stores. He dismisses the notion of a 100,000 sq ft Ikea-style store in India, except where “enormous” volumes might justify high maintenance costs. “At 40 to 44 degrees in the summer I’m going to have to air-condition the whole thing. That would be an environmental disaster.” And it would be too expensive, he adds, in a country where electricity rates are high, and power cuts force many businesses to buy costly diesel-run generators.
The biggest misunderstanding about retail in India, says Mr Bissell, is that Indians consume as copiously as westerners. Instead, Indians are more selective, value-conscious and price-sensitive. Mr Sahni of Technopak agrees. In a grocery store, an Indian consumer will not fill up a trolley as is common practice in the west. “Indians will shop with a basket. Below a certain income level, people won’t want to spend so much with each transaction.” Smaller refrigerators and limited storage space at home are also factors. “People will buy more frequently and in smaller packets,” says Mr Sahni.
But some aspects of retail in India are more abstract. To stay attuned to India’s pulse, Mr Biyani has a special unit devoted to tracking the country’s social trends to incubate ideas for new store brands and strategies.
The “Future Ideas” group includes sociologists, interior designers, graphic designers and other cultural experts. One of their biggest tasks is analysing the changing tastes of Indian youth.
With more than half of India’s population under the age of 25, understanding their consuming habits and aspirations is a priority for the Future Group. “India is still family-centred, and young people influence purchases,” says Mr Biyani. But by far his biggest challenge as a retailer is managing the speed of change in India.
“How do you make an organisation that is not permanent in thought, structure or design?” asks Mr Biyani. “Retail in the next five years will be different. Nothing is permanent.”
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