How Outlet Malls Rip Us Off

July 14, 2009 — -- I had come to Vegas to gamble, though in truth the casino was only a detour. My mission was to check out the retail gambit, which in Vegas seemed just as dicey as the slots. Scores of stores circle the hotel lobbies, and hundreds more line the Strip, hawking everything from tattoos ("Fresh needles for every new customer!") to Chopard Haute Joaillerie watches with an optional diamond wrist strap.

It is terra incognita for a bargain hunter, but fortunately I had a guide: Gillian Naylor, a professor of marketing at the University of Nevada, Las Vegas. Naylor's paper, "Price and Brand Name as Indicators of Quality Dimensions for Consumer Durables," in the Journal of the Academy of Marketing Science, had alerted me to her expertise in connecting the dots of brand name, price, and consumer perception. Our destination today was a premium outlet mall.

The New York Times once reported that outlet malls were not only the fastest growing segment of the retail industry but one of the fastest growing segments of the travel industry. The total distance that Americans travel to outlet malls each year equals 440,000 circumnavigations of the globe. If that number seems a little abstract, consider this: The distance to the moon is roughly equal to 10 trips around the globe. That is, we make 44,000 moon launches' worth of outlet visits each year. And all for what?

Factory outlets and Las Vegas casinos both play on the natural human desire to "beat the house." The difference is that when we lose in Vegas we know we've lost. At the outlets, our desire for bargains can blind us to what we really want, which is value. We believe we've won—no matter how badly we lose.

People travel celestial distances to outlet malls because until recently outlet malls were located celestial distances from people. On the surface this makes no sense; as a rule investors won't put money into malls without the requisite "threshold population densities" that all but ensure sales. But outlet malls are different. Resolute in their remoteness, they stand secure that, like Muhammad and the mountain, the customers will come to them.

The remote location of outlets is not merely a defensive, cost-saving maneuver. It is also a deliberate strategy. In the public mind, convenience is a trade-off for price, and price is traded off for convenience. Inconvenience connotes cheap, while convenience connotes pricey. In a very real sense, outlets are the anti-convenience store. Visiting the outlets demands an investment in time, deliberation, and energy beyond what we invest in most other leisure activities. We have to work to get there, piling up hefty "sunk costs."

All that time! All that gas! Psychologically speaking, all this and more must be repaid in the form of purchases made. In making that long trip to the mall we are actually engaged in a transfer of power from ourselves to the outlet itself—it has already extracted a price from us. Our expectations are raised at the same time that our guard is lowered, and in making this bargain we are willing to forgo many things that we once demanded from a satisfying shopping experience: variety, serendipity, aspiration—and fun.

Navigating Las Vegas Premium Outlets was anything but fun: 435,000 square feet of brand-name storefronts lined up in standard mall formation like so many dominos. There was no place to sit, and most customers looked exhausted and not what you'd call fashion forward. Though not all were wearing T-shirts emblazoned with slogans, enough were to make Naylor, decked out in a Diane Von-Furstenberg style wrap dress accented with a stunning Plino Visona handbag, a true standout.

A single mother of three, Naylor knows a thing or two about value. On our 20-minute drive to the mall, she mentioned that her youngest daughter, a high school senior, was mulling over her college choices. Naylor had constructed a spreadsheet of public universities offering the best value for the money and had given her daughter a choice of the top three.

Given this assiduous attention to value, Naylor's opinion of outlets is worth noting: She uses them, but sparingly. She prefers department stores, which she said generally carry better quality merchandise at prices that are frequently lower than outlet levels. Still, we were at the outlet now, window-shopping our way down the long row of storefronts—Crabtree and Evelyn, Journeys, and Samsonite. We detoured at Naylor's suggestion to have a look inside Crescent Jewelers, part of a West Coast chain that occupied a spacious corner across the mall from a K.B. Toy Outlet.

Crescent was as dimly lit as the casino had been that morning, and spookily devoid of customers. A matronly "associate" with the helpful look of an elementary school librarian greeted us the moment we crossed the threshold, and we asked her to show us the store's best-selling item. She unlocked a glass case displaying "circle of life" pendants; dainty rounds of white gold or other precious metals encrusted with diamonds. She reached in, pulled out a pendant, and turned it over to reveal the manufacturer's suggested retail price: $3,329. She quickly assured us that this was not the Crescent price. What was the Crescent price? She smiled. It was $832, one-quarter of the original price. This seemed an astonishing discount.

But was it worth $3,329 or, for that matter, $832? The embedded diamonds seemed to be of industrial quality, tiny specks that barely twinkled. The 14-carat white gold setting had the look of stamped tin. The clerk pulled a calculator out from behind the counter. "I can get you a better price," she said, "if you are willing to buy today." We asked who designed the pendant and where it was made. The clerk admitted cheerily to having not a clue and called over the manager, a man at least two decades her junior who looked less like a jeweler than a counterman at Johnny Rocket.

The manager didn't know who designed the pendant or where it was made, but he did express some certainty that the diamonds "probably come from someplace in Africa." He assured us that if we truly desired this item, he would give us the "best possible price." Just how good a price we never learned because our desire was less than true. A quick check on the Internet a few days later revealed that the diamonds in the circle of life were in fact just one step north of industrial grade, and what appeared to be identical pendants were selling on eBay for prices ranging upward of $299.

Discounters like Crescent succeed by offering the perception of value using two signals: one, being situated in an outlet mall associated with so-called premium brands, and two, setting very high "reference" prices. Had we wanted the pendant but were uncertain of its value, the $3,329 reference price would almost certainly have swayed us, regardless of whether we knew it to be inflated.

Most of us are suckers for this "high/low retailing," particularly when we are shopping for what we think of as luxury goods: leather gloves and wallets, silk jackets and ties, linen shirts, high-end stereo equipment, and designer anything. A designer label can make us believe that a flimsy T-shirt is worth the $150 manufacturer's suggested price (MSP) or at least close enough to it to make it a steal at $25. Rummaging through a pile of boxy, ill-fitting cashmere sweaters reliably discounted to $75.99 at basement stores each holiday season, we suspend disbelief that the $250 MSP might actually mean something.

Donald Lichtenstein, a professor of marketing at the University of Colorado, has devoted much of his career to the link between cost and value. "The biggest misconception is that consumers believe that if something is not true, the store is somehow not allowed to say it," he told me. "Whatever the legal considerations, in reality the whole consumer protection thing is very limited. You have to be your own policeman. When it comes to prices, background knowledge is absolutely critical."

Most of us think we know a lot about prices, and we do. We know the price of things we buy every week: gas, soft drinks, lunch at our favorite sandwich shop. We know what it costs to ride the subway, the price of the Sunday paper, and the cost of the cup of coffee that goes with it. Things we pay for less frequently—furniture, rugs, jewelry, mattresses, computers, digital cameras, used cars—are things we tend to know less about, including price.

Reference prices and selective discounting direct our everyday buying behavior in ways most of us don't notice and would never suspect. At the grocery store we are far more likely to buy an item at a reduced price even if the sale price is higher than the regular price at another store. Just seeing the difference between the full and reduced price motivates the purchases.

It is as though, rather than spending the cost of the product, we're actually earning the savings. So whether or not you were actually looking for that product or can even use it, you now desire it. This phenomenon holds an almost irresistible psychological allure. "No one—not even me—is not influenced by reference prices," Lichtenstein said. "Once you see them, you can't get them out of your head."