You come to pick up my sofa — still in original packaging, never opened, offered as-is on Craigslist. Naturally, your first thought is: “What’s it cost?”
“Don’t worry about it, man! Take it home, then we’ll run the numbers later today.”
“Very well”, you say, figuring it couldn’t be more than what you’d reasonably expect a really basic, small-ish new sofa with cheap fabric cover to cost, less depreciation once it left the showroom — maybe $500, maybe even $700? You’ve got about $1200 in your checking account, you’re good to go.
“What the hell?! Who pays $13,860 for a sofa?”
“Oh, no worries,” I tell you. “I offer a generous 85% discount for same-day on-the-spot payment. For today’s charges of $2079, are you paying with Visa or MasterCard?”
Your face is awash with total astonishment. “Who the hell pays $2079 for a sofa?”
“Well, that’s a very generous prompt payment discount of 85%.”
“A discount off of $13,860? Where the hell did you come up with that?”
“Um, that’s the Standard Sofa Charge, sir.”
“Standard? Based on what? Do you know of a single person, business or other entity who would pay anywhere near $13,860 for a sofa?”
“$13,860 is the Standard Sofa Charge for anyone,” I say, handing you a short itemised bill with a line item “SOFA”, quantity 1, unit price 13860.00.
“Come on, you and I both know nobody pays $13,860 for a sofa!”
“Well… will today’s charges of $2079 be on your Visa or MasterCard?”
Your first inclination is to return my sofa, but it’s a little late for that. Your kids are in love with it, you’ve already spilled Corn Flakes on it — it’s yours now. It was your mistake not to have agreed upon a firm price before hauling it away, anyway. With a heavy sign of resignation, you accept your fate and the cross you must bear of your expensive mistake:
“Okay, fine. I’ll pay $2079, although — just for the record — that’s ridiculous. I can get a tiny little two-seat fabric-covered sofa like this in any other developed country for less than half of that, new, right from the furniture store. It’s going to take me a week or two to come up with two grand, though. I’m going to need to borrow some from my friends and family. Can you give me about 30 days? I’ll pay you $500 now so you know I’m good for it.”
“Sure thing,” I answer helpfully. “Actually, you can pay off the remainder over four months, in four easy payments of $741.25.”
“WHAT? That’s a total of $3465.”
“In this case, I can only extend a 75% discount.”
“So, you’re asking me to pay $3465 instead of $2079 now. That’s an extra $1386.”
“That’s correct, sir. To extend terms you must pay an additional 10%.”
“10%? What are you talking about? That’s an extra 66% on top of the $2079 I’d otherwise have to pay!”
“Well, no, you’re only paying 25% of the Standard Sofa Charge.”
“What the hell are you talking about? I’ve seen your other Craigslist ads, and I have a really hard time believing anyone would pay you more than about $800 for any of your other entry-level sofas. I could see a really good one going for $1000, but that’s tops!”
“Hmm, well, actually, many people pay the Standard Sofa Charge. You’re getting a hell of a deal.”
“Can you show me at least one person who has paid anywhere near the Standard Sofa Charge? Even half of the Standard Sofa Charge?’
“I am not at liberty to disclose that information, I’m sorry.”
“Why am I being asked to negotiate against this bullshit, made-up Standard Sofa Charge figure, when there is not an iota of evidence that it, or anything remotely close to it, clears the market? If you can show me at least one person or organisation that has paid anywhere near the Standard Sofa Charge for a sofa of this class…”
“Well,” I say smugly, “obviously, some of my repeat buyers have negotiated volume discounts due to their market-moving power – resellers, secondhand furniture stores and so on.”
“I’ll bet! And I have a pretty hard time believing any of them are paying more than $2000 for even the best, most premium fabric starter sofa. $2000 will buy me a leather L-shaped sectional.”
“I can’t disclose that. But you’d be surprised how close we get to the Standard Sofa Charge. If you worked for Foolhardy O’Toole’s Pre-Owned, you’d get to see the bills and get an idea of how much they pay.”
“Look,” you say, “I don’t really care how much O’Toole’s pays, although may a vengeful God smite me where I stand for I know it sure as hell isn’t $13,860, or even $3465. $2079 is already beyond the pale, but I figure what’s done is done. However, there is simply no way I can afford $3465! I came here looking for a Craigslist deal!”
I clear my throat and shift in my seat slightly uncomfortably. “Well, we do offer financial aid for those who may have trouble paying. We may be able to get you a discount of even more than 85%.”
“What the hell? Why didn’t you say that before?”
“Here’s a four page application. You’ll need to disclose your gross income, itemise your expenses, and provide three months of bank statements and last year’s tax returns.”
“That’s a lot of work”, you figure. “It sounds like the kind of work someone with a very low income would find worthwhile to do.”
“Mhm…” I mutter.
“… it almost sounds like a price segmentation and revenue optimisation strategy, designed to extract the highest price possible, in the most opaque and duplicitous manner imaginable, for one of the most price-inelastic goods or services in existence, from every patient, according to a scrupulously calibrated sense of their maximum ability to pay…..”
“Please return the last three pages of the form to me by e-mail or fax at your earliest convenience.”
By now, you’re visibly frustrated:
“Look man, I just have a cash flow issue because I was not even remotely prepared to have to fork over two grand for the sofa in one day. I can get you the full $2079 in 30 days. I don’t need a multi-month installment plan or what amounts to a 66% financing charge.”
“You’d be surprised at the range of incomes of qualified applicants.”
“But there’s one thing I still don’t understand. You and I both know that the Standard Sofa Charge figure is bullshit, that it has absolutely zero attachment to market reality, and that nobody pays anywhere near the Standard Sofa Charge. So, why is the Standard Sofa Charge even a thing? What on God’s earth is the least bit ‘Standard’ about it? And why are all of your ‘discounts’ with reference to it as a negotiation anchor when you and I know damn well that you can’t sell a sofa for $13,860?”
“That’s the Standard Sofa Charge, sir.”
“And why in the hell did you come at me with the financial aid offer only once I threw enough of a shit-fit?”
“Well…” I chuckle nervously. “That’s not exac–I gotta get to a meeting…” I trail off as I beeline for the door.
My son Roman was born on Thursday via C-section. We had a four day hospital stay afterward and just got home. We are uninsured cash payers, and this is more or less the conversation I had with the hospital’s finance office today. The only difference is that the Standard C-Section Charge was $24,790¹, the cash payer discount was 75% (to $6197), and the giant middle finger installment plan was at a 65% (+40% premium, or +$2479 = $8676).
Welcome to the only developed country where this is possible. You can’t make this stuff up.
¹ This $25k is just the hospital fee for four days of hospital stay, nursing, as well as use of the operating room and assistance; it does not include several thousand dollars in additional obstetrician-gynaecologist and anaesthesiologist fees for the actual operation.