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FINGERHUTS PRICE STRATEGY

Businesses have target niches. Ours is the moderate-income consumer. We neither
apologize for, nor hide the fact that we serve this growing populationeven when others
wont.
Ted Deikel, chairman and CEO of Fingerhut Companies, Inc.

Jane Johnson, director of corporate communication at Fingerhut, let her eyes swim over
the legal pleadings and news clippings that lay before her. It was November 1996, weeks before
the Minnetonka-based direct marketing companys holiday rush, and an unfavorable article had
just appeared in a major Minneapolis paper, the Star Tribune. The article drew attention to a
lawsuit pending against the company and suggested that Fingerhut made its profits by exploiting
the poor. In January, four Minnesota women had brought suit in Hennepin County District Court,
alleging usuriously high interest rates on merchandise they had purchased from Fingerhuts
direct marketing catalogs. The lawsuit had gained the support of the Minneapolis Urban League,
Minnesota COACT, and the Minneapolis chapter of the NAACP; these groups had filed a friendof-the-court brief in support of the customers. Worse, the lawyers representing the women were
attempting to have the case certified as a class action.1 If this move was successful, customers in
at least 20 states might become involved.2
John Ellingboe, Fingerhuts vice president and general counsel, seemed convinced that
the lawsuit had no legal merit and would be eventually dismissed under Minnesotas time-price
doctrine, an exception to the usury law. Yet Johnson found it deeply troubling that the
customers had brought the lawsuit at all. One of the things that had attracted her to Fingerhut was
the high level of social consciousness exhibited at all levels of management. For example, CEO
1

Marjorie Kelly, Some Businesses Specialize in Capitalizing on the Poor; Fingerhut a State Firm that Targets
Low Income Folks, Star Tribune, November 4, 1996, 3D.
2
Tim Gray, Tampa Bays Latest Catch has Financial, Legal Problems, St. Petersburg Times, May 1, 1996,
1E.
This case was prepared by Lee Fennel under the supervision of Gretchen A. Kaslow, assistant professor of Business
Administration, and June A. West, assistant professor of Business Administration. It was revised by Research
Assistant Jenny Mead under the supervision of Patricia H. Werhane, Ruffin Professor of Business Ethics, and R.
Edward Freeman, Elis & Signe Olssen Professor of Business Administration, Darden Graduate School of Business,
University of Virginia. It was written as a basis for class discussion rather than to illustrate effective or ineffective
handling of an administrative situation. Copyright 1999 by the University of Virginia Darden School Foundation,
Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenpublishing.com. No part of
this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form
or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the
Darden School Foundation. Rev. 5/03.

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Ted Deikel was renowned for his philanthropy and environmental awareness. But this lawsuit
painted Fingerhut as a predatory company that suckered low-income consumers by using unfair
and deceptive marketing techniques. The fact that Fingerhuts advertising and credit policies
might technically be legal didnt necessarily make them moralor did it?
Company Background
The company began in 1948 when brothers Manny and William Fingerhut began selling
seat covers to car owners through the mail. By 1996, Fingerhut had grown into a $1.8 billion
direct marketing superpower, selling a smorgasbord of consumer goodsclothing, housewares,
furniture, electronics, appliances, and morethrough an array of specially targeted catalogs. It
had become the second-largest catalog company in the nation,3 with more than 7 million loyal
customers and about 9,500 employees.
In 1996, it laid off 570 employees in Minnesota and opened two customer service centers
in Tampa, a move that allowed it to take advantage of a larger bilingual labor pool and better
winter weather conditions.4 Its earnings had been weak for the past two years, in part because of
rising postal and paper costs and a failed TV home-shopping venture.5 A co-branded Mastercard
that it introduced in 1995 seemed to be catching on nicely, however, and the possibility of
expanding into the financial services sector offered definite opportunities for growth. (See
Exhibit 1).
The Target Market
Fingerhut consistently distinguished itself from other direct marketing companies by
explicitly targeting those customers with household incomes falling in the lowest one-third
nationally. In 1996, this amounted to almost 89 million people, or 33.7 million families.6 In that
year, the median household income in the United States was $35,492.7 Fingerhuts target market
included most of the households in the bottom two quintiles, which had mean household incomes
of $8,596 and $21,097 respectively. These two quintiles together received 12.7% of the total
household income for the year.8
This segment of the market had been largely untapped by marketers and underserved by
financial institutions. Many individuals falling into this category had no credit or poor credit, and
3

Mark Albright, Fingerhut Center is Symbol of Companys New Strategy, St. Petersburg Times, September
10, 1996, 1E.
4
Ibid.
5
Gray, 1E.
6
Based on data in U.S. Department of Commerce, Bureau of the Census, Money Income in the United States:
1996 vii (1996), 60197.
7
Bureau of the Census, v.
8
Ibid.

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they were typically unable to obtain credit from traditional lenders or credit card companies.
Most were among the estimated 25% to 30% of U.S. households that live paycheck to
paycheck.9
A typical Fingerhut customer had a household income of about $18,000. Many customers
were empty-nesters or people just starting families, and most were femalesome 90%,
according to a 1986 article.10 In 1996, although only about 5% of Fingerhuts customers were
Hispanic, they represented its fastest-growing segment.11
Risk, Choice, and the Low-Income Consumer
Author David Caplovitz stated that two options are available to the low-income
consumerforgoing major purchases or being exploited. While he admits that the marketing
system that is targeted to the poor is a deviant one, it persists because it fulfills social functions
that are presently not fulfilled by more legitimate institutions. The poorest risks are shunted to a
special class of merchants who are ready to accept great risk.12
In 1996, the picture was much the same, but some efforts were underway to improve the
choices available to consumers. For example, in 1994 and 1995, a Minneapolis-based group
called ACESS (Aggressive Consumer Education and Support Strategies) began offering credit
cards for use in Daytons and Target stores to low-income customers unable to meet traditional
credit requirements.13 The initial screening mechanism proved inadequate, however, (almost half
of the payments made by participants were late) requiring ACESS to revamp its eligibility
criteria.
The Marketing Approach
Fingerhut attracted and retained its target market through strategies tailored to the low- or
moderate-income consumer, including an installment payment option. Boldface monthly
payment amounts and a smaller cash price accompanied each item. Exhibit 2 illustrates
installment plan details. Virtually all of Fingerhuts customers purchased their merchandise
through this installment plan.14 Coupon books were delivered along with the merchandise rather

Juliet B. Schor, Overspent American (New York: Basic Books, 1998), 20.
Eileen Norris, Fingerhut Gives Customers Credit, Advertising Age 57 (March 6, 1986): 19.
11
Albright, 1E.
12
David Caplovitz, Poor Pay More; Consumer Practices of Low Income Families (New York: New York Press,
1967), 180.
13
Susan Lorde Martin and Nancy White Huckins, Consumer Advocates vs. the Rent-to-Own Industry:
Reaching a Reasonable Accommodation, American Business Law Journal 34 (Spring 1997): 407.
14
A 1997 article reported that 99% of Fingerhut customers used the payment plan; Paul Miller, Fingerhut, to
the Bone, Catalog Age 14:13 (December 1997): 5.
10

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than mailing consolidated statements. Typically customers had several active Fingerhut
coupon books, representing different purchases at various stages of repayment.15
Many of Fingerhuts customers would not qualify for other credit options like credit
cards and department store charges. A full 40% had so little credit history as to have no
information available in a credit report. Thus, Fingerhut was taking a risk with new, untested
customers, selling them less expensive items. Customers who paid back the balance on time
would then be promotedmade eligible to finance progressively larger purchases. They also
would receive personalized mailings from the company with messages like Congratulations!
Youve been selected to receive our exceptional customer award! along with a certificate
suitable for framing.16 Customers who fell behind on their payments were contacted by
Fingerhut personnel, who attempted to arrange a viable repayment plan.
Fingerhut made extensive use of its database to personalize its mailings and target
specific customers with specialty catalogs (in 1992, there were about 75 such catalogs, covering
categories like outdoor living, electronics, and juvenile apparel and toys).17 Personalized inserts
noting birthdays, anniversaries with Fingerhut, and recent purchases further enhanced customers
perceptions of personal service.18 Fingerhut also relied on frequent contact with the customer to
limit bad-debt losses and ensure a steady stream of sales. Fingerhuts customers maintained, on
average, a seven-year relationship with the company.
The Database
It all goes back to the database.Ted Deikel19
Central to Fingerhuts marketing strategy was its massive database system, which
contained more than 500 pieces of information on each of more than 50 million active and
potential customers.20 The information in the database had been compiled over more than 30
years and kept up-to-date using state-of-the-art technology.21 Deikel termed it the worlds most
sophisticated database. The database application, Fingerhuts Customer Contact System, had
been developed with Lincoln Softwares Engineer toolset and was one of the largest client/server
applications in the world.22

15

Sarah Brehm, Catalog Shopper Must Be Careful, Madison Capital Times, February 21, 1992, 1D.
Philip Kotler and Gary Armstrong, Principles of Marketing 7th ed. (Upper Saddle River, NJ: Prentice Hall,
1996), 439.
17
Jim Bessen, Riding the Marketing Information Wave, Harvard Business Review (September/October
1993): 150.
18
Ibid.
19
Susan Chandler, Data is Power. Just Ask Fingerhut, Business Week (June 3, 1996): 69.
20
Ibid.
21
Harlan S. Byrne, Shopping Made Easy, Barrons (July 25, 1994): 20.
22
Information taken from a case study on Lincoln Softwares Website http://www.ipsys.com/fingerh.htm.
16

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The detailed information Fingerhut gathered about each customer, including age, marital
status, number of children, birthdays, and hobbies, enabled it to make predictions about the types
of products each individual would be likely to purchase. It then sent each household the
appropriate mix of targeted specialty catalogs.23 Jim Bessen described the astounding degree to
which Fingerhut collected and used computerized information about its customers to achieve
marketing goals:
Every catalog mailing and major promotional campaign at Fingerhutthere were
nearly 150 in 1992is based on statistically determined predictions about
consumer behavior. Fingerhut captures as many as 1,400 pieces of information
about a household. These include typical demographic items like income and
home ownership, appliance ownership, and purchasing histories for various
categories of products.24
Pricing Strategies
Fingerhuts focus on the coupon payment method required it to coordinate the pricing of
two different types of commoditiesthe actual pieces of merchandise that it sold, and the
closed-end credit that was wrapped around each item.25 The installment payment plan bundled
these two commodities together and offered customers a consolidated monthly price.
Pricing theory has recognized that the contextual and conceptual frame of a purchase
decision can have profound effects on the perceived fairness of a price.26 The tactic of breaking
down a large purchase into smaller weekly or monthly payments alters the purchase context
dramatically and has been successfully used by marketers to sell everything from encyclopedias
to automobiles.27 Instead of focusing the customers attention on the weeks or months of work
that would be required to save up the full purchase price of a particular good, the low monthly
payment invites the customer to imagine enjoying the new purchase by making negligible dayto-day sacrifices on items of little or no lasting significance. Sometimes the insignificance of the
necessary belt-tightening is made explicit, as in the Chevrolet advertisement that boasts, [T]his
Cavalier costs less a day than a burger, large fries and a shake[just] $6.23 a day.28 Reframing

23

Chandler, 69.
Bessen, 150.
25
The setting of a service element such as an interest rate is a pricing decision exactly like the pricing of a
product purchased in a store. Kent B. Monroe, Pricing: Making Profitable Decisions 2nd ed. (New York:
McGraw-Hill, 1990), 430. Fingerhut also had to make pricing decisions concerning the shipping and handling
incident to each sale.
26
Monroe, 72.
27
Thomas Nagle and Reed K. Holden, Strategy and Tactics of Pricing; A Guide to Profitable Decision Making
2nd ed. (Englewood Cliffs N.J.: Prentice Hall, 1951), 309.
28
Ibid.
24

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the purchase decision in this way is particularly attractive to low-income consumers, since it fits
within their paycheck-to-paycheck frame of reference.29
The extension of credit, which allows the customer to try out the good before making
any payments, may also contribute to a perception of value. Because buyers quickly assimilate
new merchandise into their frames of reference once it has entered the home, they are willing to
pay for the goods rather than incur the loss associated with giving them up.30
Customers are also less price-sensitive if they believe that a particular retailer is offering
them some uniquely valuable feature that is unavailable elsewhere.31 Fingerhut was able to
differentiate itself from its competitors by extending credit to customers who would not be able
to obtain credit elsewhere. Fingerhuts willingness to wrap merchandise in credit created extra
value for consumers and made them less sensitive to the prices of the commodities included in
that package. Fingerhut also distinguished itself by fostering a socially responsible corporate
image, leading the industry in recycling and other environmentally conscious practices and
developing personalized relationships with its customers via its database.
Arguably, the low-income market is underservedespecially with respect to credit.
Typically, a small number of creditors serve low-income areas and many low-income buyers do
not have the transportation or information necessary to shop intelligently.32 A low-income
consumer may find few alternative suppliers willing to extend credit, and this will make the
consumer less sensitive to price. Moreover, in setting prices, the risk and costs associated with
extending credit must be taken into account.33 To the extent delayed payments are tolerated or
expected, pricing must account for that as well.
The Competition
The goods retailed by Fingerhut were available from other sources, like K-Mart and WalMart, as well as Sears and J.C. Penney, which sometimes offered the same items at a lower cash
price. As Richard Tate, Fingerhuts senior vice president of merchandising explained, We cant
compete on price. We are the highest-priced guys in town. The value is not in the total price, its
in the total offer.34
Fingerhuts finance charge was 24.9% APR, and interest rates for credit cards ranged
from low teaser rates to around 19%. Store charge accounts such as Sears typically fell in the
21% to 22% range. However, the interest rate could run higher on closed-end store credit
29

James Agger, Big Victory in N.J. Rent-to-Own Case, Legal Intelligencer (October 31, 1996): 3.
Nagle and Holden, 313.
31
Ibid, 80.
32
George J. Wallace, The Logic of Consumer Credit Reform, Yale Law Journal 82 (1973): 46182, 468.
33
Monroe, 347.
34
Ann-Margaret Kehoe, Selling a Solution: Fingerhut Takes a Page from Supermarkets, HFN, The Weekly
Newspaper for the Home Furnishing Network, December 8, 1997.
30

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arrangements similar to Fingerhuts installment plan. Fingerhut priced both elements of its
bundlethe credit and the products themselvesat higher rates than competitors. If this was
the case, then why did Fingerhut continue to enjoy such a large share of the market?35
One explanation may be that many customers do not qualify for the types of credit that
would make alternative purchase decisions attractiveor even possible. Caplovitz made a
similar observation regarding low-income consumers who chose to patronize more expensive
shops in their own neighborhoods: Although some families may buy from neighborhood
merchants out of ignorance of alternatives, others may do so because they fail to meet the credit
requirements of the more reliable stores. In part, the low-income family is caught up in the
choice of doing without or relying on credit and therefore paying more.36 Fingerhut provides
these families with an opportunity to purchase quality name brand products at affordable
monthly payments (see Exhibit 3). The availability of credit has long been recognized as the
single most salient factor in a low-income consumers decision about where to buy.
If a customer cannot qualify for other forms of credit (e.g., a department store charge card
or a credit card) the price of that credit becomes meaningless. If that same customer has no cash
on hand, the lower merchandise prices advertised elsewhere are likewise irrelevant. Such
customers may save up for their purchases and pay a lower cash price at a competitors store. But
social and cultural factors make this option very unattractive to many consumers. While a
savings fund earmarked for a particular item might be raided every time a short-term need or
desire arose, the purchase of merchandise on credit represents an irrevocable commitment.
Because the new purchase immediately becomes part of the buyers frame of reference, the
threat of losing it provides a powerful incentive for meeting the payments as they come due.
Indeed, many low-income families do not maintain a bank account but choose instead to rely
solely on check-cashing services and money orders for their financial needs, even though these
services also exact hefty fees.37 This behavior makes saving up for a major purchase even more
difficult.
Layaway plans traditionally have offered a buyer a means for overcoming the difficulty
in saving for a particular item, but here too there are costs and difficulties. Most significantly, a
layaway item does not go home with the consumer and so cannot become integrated into his or
her lifestyle. The consumer may lose enthusiasm for making payments. Further, there may be
restrictions, time limits, or fees which make layaway suboptimal. For example, K-Mart charges a
$3 layaway fee and limits the payment period to 10 weeks, far too short for most consumers.
Wal-Mart does not charge a fee, but posts a lengthy list of rules and regulations which
complicate the transaction and limit consumer choice (like a prohibition on laying away seasonal
items more than a certain number of days in advance of the holiday to which such items relate).

35

Jeff Bailey & Scott Kilman, More Borrowers Appear to Be Wising Up about Credit, Star Tribune, March 1,
1998, 5d.
36
Caplovitz, 98.
37
Ibid.

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NAACP vs. Fingerhut

Fingerhut targets poor and minority neighborhoods fairly aggressively, said Anne
Bergman, an attorney who drafted an amicus curiae (friend of the court) brief on behalf of
several groups interested in the outcome of the lawsuit, including the NAACP and the Urban
League. Lenders like Fingerhut really siphon money from these areas.38
Two basic arguments seemed central to the attack on Fingerhut. First was the allegation
that Fingerhut was charging an effective interest rate that exceeded the legal limit for
transactions of the type in which Fingerhut was engaged. Minnesotas general usury statute
prohibited lenders from charging interest rates in excess of 8% annually, but was riddled with
exceptions and had limited applicability. Bill Crowder, one of the attorneys for the customers
said that under Minnesota law, anybody can charge up to 8% interest. There are statutory
exceptions for savings and loans, banks and credit cards. But Fingerhut doesnt fit within those
exceptions.39 Fingerhuts Ellingboe contended that the usury law was never meant to apply to
financing that accompanied the sale of merchandise. Such sales, he argued, were covered by the
common law time-price doctrine which permitted merchants to charge a lower price for cash
sales than for sales on time.
The second prong of the attack on Fingerhut was the assertion that it was preying on
low-income people through deceptive or misleading advertising. Critics noted that the low
monthly payments were prominently displayed in the catalogs next to color pictures of the
merchandise. The finance charge, effective interest rate, shipping and handling charge, and total
cost of an item could only be found by referring to a tiny print in a multi-column table on another
page. Bergmans brief accused Fingerhut of playing hide-the-ball with bottom line information
to confuse and exploit less-educated, less-sophisticated customers.40 This argument, which
depended to some extent on assumptions about the relative powerlessness and vulnerability of
the target market, called into question Fingerhuts overall marketing strategyindeed, even its
choice of a target market.
Jane Johnson decided that the second argument was the one of primary concern for the
company. She doubted that the public would base buying behavior or attitudes towards the
company on the outcome of a technical legal argumentalthough she certainly hoped that
Ellingboe was right in predicting the outcome of the case. Far more important, she thought,
would be the publics perceptions of Fingerhuts practices. If Fingerhut were viewed as
manipulative and sneaky, coaxing hard-earned dollars from the poor through tricks, fine print,
and hide-the-ball credit terms, the blow to Fingerhuts image could be devastating.

38

Gray, 1E.
Ibid.
40
Kelly, 3D.
39

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Fingerhuts Response
Fingerhut CEO Ted Deikel had wasted no time in responding to the unfavorable news
column that had appeared in the Star Tribune. In his response, which appeared in that same paper
the following week, he asserted that Fingerhuts finance charges were legal under Minnesotas
time-price doctrine, which allows merchants to charge a different price for an immediate cash
sale than for a purchase taking place over time. He also called the suggestion of unethical or
predatory practices an outrage.
There is nothing tricky about what we do, Deikel wrote:
We provide our customers with purchasing options, and for those customers who
do not have credit cards or enough free cash on hand to pay for items in a single
payment, our in-house credit plans offer them the flexibility of buying
merchandise in installments over time. And we make it easy. Unlike most
retailers, Fingerhut will extend credit to customers who do not have a credit
history, often without requiring credit applications or down payments. The risk is
all ours.
Deikel also pointed out that by choosing to serve a riskier market segment, Fingerhut suffered a
bad debt ratio two to three times the industry average, which was 15% of sales. He emphasized
that Fingerhut enjoyed tremendous customer loyalty, and that many customers remember when
Fingerhut was the only company that offered them credit when no one else would.41 Indeed,
Fingerhut customer Marilyn Gnat, a retired salesclerk and mother of nine children, had expressed
precisely that sentiment in a recent Business Week article: When I started out, Fingerhut was the
only place that would give me credit.42
Social Factors
Inner-city Chicago resident Jean Shelby paid over $1,100 for a TV/VCR combination on
Fingerhuts installment plan, although the same item was available for a cash price of less than
half that amount elsewhere. Her explanation was simple: I want things right away.43 Her
attitude was not an uncommon one. In recent years, consumers at all income levels have been
opting for costlier credit purchases because of the perceived comfort, convenience, and status
advantages associated with immediately acquiring the goods. As Juliet Schor recently noted, the
fraction of Americans disposable income that goes toward debt servicing continues to rise; it has
now reached 18%. The total amount of debt held by the average household has increased
relentlessly for decades, and it now equals just about what that household makes in any given
41

Ted Deikel, Fingerhut Serves Its Customers Well, Star Tribune, November 11, 1996, 3D.
Chandler, 69.
43
Charles W. Lamb, Jr., Joseph F. Hair, Jr., and Carl McDaniel, eds., Principles of Marketing, Annotated
Instructors Edition, 2nd edition (Cincinnati: SouthWestern Publishing, 1994), 210.
42

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year.44 In a consumer guide, the American Bar Association declared credit almost as American
as apple pie.45
Obtaining certain consumer goods is extremely important across all sectors of society.
Credit offers consumers a buffer against fluctuations in their income due to hardships or illnesses
and provides the ability to make purchases that are commensurate with their lifetime earnings.46
As the ABA consumer guide explains, Only you can decide whether it is worth the cost of the
finance charge to have a car or other goods and services now, rather than later.47
Alternatives to Traditional Credit
Pawnshops and title pawnbrokers
Pawnshops are a traditional venue for short-term credit, dating back to the turn of the
century, and they have recently experienced a resurgence of popularity. Between 1986 and 1996,
listings for pawnshops increased 60% nationally.48 They are exempted from general usury
statutes and are often permitted to charge 20% or more per month, or 240% annually. At least
11 of the 13 southern states allow pawnshops to charge 240% on loans; Georgia allows 300%.49
While the consumer loses use of the goods and pays a high interest rate, the pawn broker still
benefits by gaining ownership of the merchandise for a fraction of its value.
Title pawnbrokers specializing in automobiles operate a bit differently: a cars title is
taken as collateral for a small loan, often for only a few hundred dollars and usually for no more
than 10% of the vehicles value.50 The effective interest rate for such short-term loans may be
over 900%.51 The borrower maintains possession of the vehicle in the interim, but if the loan is
not repaid on time and in accordance with the terms, the car is promptly repossessed. At that
point, the car belongs to the title broker, who can resell it (perhaps even to its former owner) at a
price close to its actual valuean amount that may be more than ten times the amount of the
defaulted loan.52

44

Schor, 72.
American Bar Association, You and the Law (Chicago, 1993), 243.
46
Wallace, 478.
47
American Bar Association, 243.
48
Mary Kane, Fringe Banks Profit from Customers Without Banks in Michael Hudson, ed., Merchants of
Misery: How Corporate America Profits from Poverty (Monroe, Maine: Common Courage Press, 1996), 5257.
49
Hudson, 5257.
50
R. Robin McDonald, Lawsuits to Decide Legality of Rates, Fees, Atlanta Constitution, February 22, 1998,
5d.
51
Kathleen Keest, Cost of Credit: Regulation and Legal Challenges (Boston: National Consumer Law Center,
1995), 59.
52
McDonald, Lawsuits.
45

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One of the newest and costliest forms of short-term credit is the lease-back.53 Under
this arrangement, a dealer buys merchandise from a consumer in need of short-term credita
television set, for exampleand pays the customer in cash. But instead of taking possession of
the item, the dealer allows the customer to lease it back from the company at a high weekly or
monthly rate. To get the merchandise back, the customer must pay not only any outstanding
rental amounts, but also a buy-back price and sales tax. Lease-back dealers claim they are
immune from attack under state usury laws because they are not actually making loans but
merely buying, leasing, and selling merchandise. If, however, the customers cost were
computed as interest, the annualized rate would be about 900%.54
Secured credit cards
Secured credit cards offer an opportunity for consumers to establish or repair their credit
by borrowing their own moneyat a price. In order to set up a secured credit card, the customer
must deposit cash to secure the credit line. The credit limit is usually equal to the amount on
deposit, and interest rates are often higher than on unsecured cards. The idea is that this will
help them clean up their credit records and graduate to real bankcards, one commentator
explains. But they pay a high costapplication fees of $65, annual fees as high as $75, interest
rates reaching 22%.55 Meanwhile, the money left on deposit receives either no interest or a
below-market rate. This differential between what the money could earn on the open market and
what is paid by the secured credit card vendor is a very real cost of this option.56 Because a
secured credit card requires a large initial cash outlay, it has all the drawbacks associated with
saving up for a major purchase, making it a difficult and unattractive option for many
consumers.
Payday and tax refund anticipation loans
Some check cashing services offer an expensive form of short-term creditloans using
the customers own post-dated check as collateral. These loans, in small amounts, for terms of
only a week or so at a time, may have effective interest rates of 700 to 2,000%.57 Keest provides
an example of how such a loan might work:
Connie Consumer gives them a present or post-dated check for $256. In return,
she gets $200. They withhold a fee of 28% of the amount advanced. The
business agrees to hold Connies check until a later date (usually her payday).
When that date comes, Connie can either redeem the check for the full face
value, or write another post-dated check to cover it, paying another service fee.
The effective yield on this transaction? If she redeems the check after two
53

R. Robin McDonald, Lease-back Schemes So Much Worse than Pawning, Atlanta Constitution, February
22, 1998, 5d.
54
Ibid.
55
Hudson, 7.
56
Monroe, 432.
57
Ibid.

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weeks, it is 681% APR. If she redeems the check after 10 days, it is about
1,000%; after 15 days, it is over 2,000%.58
Similarly, people expecting tax refunds can get short-term refund anticipation loans
through commercial tax preparers like H&R Block. But the effective interest rate for these loans
falls between 50% and 200%.59 Bob Williams, a manager at Associates, offers a rationale for the
high rates his loan company charges on short-term loans: [A] lot of people need our services.
All were trying to provide is a service to people who might not be able to get credit elsewhere
and let them have the opportunity an upper class person might have.60
Rent-to-own
Rent-to-own offers another alternative for low-income consumers. Most rent-to-own
customers, like most Fingerhut customers, have household incomes of less than $36,000, and are
unable to obtain credit.61 David Hudson explained Rent-to-own customers routinely pay two,
three, and four times what merchandise would cost if they could afford to pay cash. For example:
A Rent-a-Center store in Roanoke, Virginia, recently offered a 20-inch Zenith TV for $14.99 a
week for 74 weeksor $1,109.26. Across town at Sears, the same TV was on sale for
$329.99.62
In the past, rent-to-own dealers have been able to avoid state and federal credit
legislation, since they claim to be leasing a product rather than extending any sort of loan. Read
literally, the TILA (Truth in Lending Act) definition of a credit sale does not include a RTO
(rent-to-own) agreement because the customer does not contract to pay the value of the goods he
or she is acquiring, agreeing merely to pay for a weeks or a months rental.63 By 1996, 43
states had rent-to-own statutes regulating the disclosure of the full cost, although few placed
limits on what the customer could be charged.64 Where limits were attempted (for example,
requiring that the total payments be no higher than twice the dealers cash price), they were
unenforceable.
Fingerhuts Dilemma
In the context of the other options available to its target market, Jane Johnson felt that
Fingerhuts pricing strategy offered customers an affordable way of obtaining valued consumer
goods on credit. Its tried-and-true installment pricing method had gained the loyalty of millions
of satisfied customers. Viewed in this way, the allegations of four customers did not seem
58

Ibid.
Hudson, 10.
60
Hudson, 45.
61
Shelly Branch, Waynes New World: Another Trashy Business, Fortune (February 2, 1998): 29.
62
Hudson, 146152.
63
Martin and Huckins, 385426.
64
Martin and Huckins. 396, n. 72.
59

-13-

UVA-E-0151

significant. But no matter how fair and reasonable Fingerhuts pricing strategy might seem to
management, Johnson knew that the lawsuit and its related publicity could damage Fingerhuts
image as an ethical, socially conscious company. And there was always the chance that
Minnesota could abolish the time-price doctrine through consumer protection legislation, as
many other states already had. Was the lawsuit a wake-up call suggesting that Fingerhuts
strategies targeted at the low-income market were ripe for revision? Johnson picked up a legal
pad and began to write, her mind racing. She had to meet with Ted Deikel and Rachel OBrien,
vice president of customer relations, in a few hours to decide on a strategy.

UVA-E-0151

-14Exhibit 1
FINGERHUTS PRICE STRATEGY
Fingerhut Financials
Income Statement
All amounts in millions of US Dollars except per share amounts
Jan 1998
Jan 1997
Revenue
Cost of Goods Sold
Gross Profit
Gross Profit Margin
SG&A Expense
Depreciation & Amortization
Operating Income
Operating Margin
Total Net Income
Net Profit Margin
Diluted EPS ($)

Jan 1996

1,609.2
-------75.5
4.7%
.087

1,535.0
738.9
796.1
51.9%
901.3
-(105.2)
-69.3
4.5%
1.40

2,027.4
830.4
1,197.0
59.0%
1,103.5

----------0.0

145.4
823.7
124.4
1,369.1
1,751.8
144.1
678.2
345.2
1,081.7
670.0
0.0

61.0
547.4
127.7
988.2
1,352.0
73.1
422.3
271.5
746.7
605.4
0.0

93.5
4.6%
40.2
2.0%
0.83

Balance Sheet
Cash
Net Receivable
Inventories
Total Current Assets
Total Assets
Short Term Debt
Total Current Liabilities
Long Term Debt
Total Liabilities
Total Equity
Shares Outstanding (mil)

Source: Hoovers Online, www.hoovers.com/annuals/7/0,2168,10827,00.html.

UVA-E-0151

-15Exhibit 1 (continued)
FINGERHUT COMPANIES INC
Partial 1998 Financials
Filing Period
Filing Type

1998/03/27
10-Q/1

1998/06/26
10-Q/2

1998/09/25
10-Q/3

Assets
Cash
Receivables
Inventory
Deferred Tax Asset
Other Current Assets
Current Assets
Net Property Plant & Equipment
Total Assets

$167,494,000
$726,847,000
$121,918,000
$214,560,000
$12,929,000
$1,320,922,000
$266,903,000
$1,699,102,000

$162,052,000
$750,688,000
$125,150,000
$213,500,000
$14,987,000
$1,348,077,000
$265,400,000
$1,737,442,000

$31,624,000
$269,211,000
$198,741,000
$85,015,000
$12,826,000
$734,288,000
$216,604,000
$1,096,908,000

Liabilities
Accounts Payable
Income Tax Expense
Current Liabilities
Allowances
Common Equity
Deferred Tax
Long Term Debt
Total Debt
Total Liabilities
Retained Earnings
Shareholders' Equity

$139,999,000
$4,803,000
$608,408,000
$181,101,000
$465,000
$27,550,000
$345,187,000
$345,263,000
$1,021,059,000
$381,503,000
$678,043,000

$149,166,000
$13,989,000
$629,686,000
$181,962,000
$472,000
$18,762,000
$345,149,000
$345,225,000
$1,036,473,000
$392,310,000
$700,969,000

$187,618,000
($11,975,000)
$538,761,000
$103,772,000
$502,000
$22,263,000
$149,000
$125,225,000
$575,084,000
$169,216,000
$521,824,000

$272,964,000
$367,335,000
$128,651,000
$10,279,000
$12,322,000
$5,505,000

$795,635,000
$283,994,000
$19,382,000
$32,166,000
$18,177,000

$949,374,000
$450,271,000
$13,827,000
($31,970,000)
$3,059,000

Income
Net Sales
Total Operating Revenue
Cost of Goods Sold
Interest Expense
Income Before Tax
Net Income
Earnings Per Share: Basic
Earnings Per Share: Diluted

Cash Flow
Capital Expenditures
$7,328,000
Depreciation and Amortization
$20,033,000
Operating Activities
$41,901,000
Investing Activities
($7,328,000)
Financing Activities
($12,497,000)
Cash at Year Start
$145,418,000
Cash at Year End
$167,494,000
Source: Data Extracted by Edgar Scan from the PricewaterhouseCoopers Global Technology Centre.

-16Exhibit 2
FINGERHUTS PRICE STRATEGY
Fingerhuts Installment Plan

UVA-E-0151

UVA-E-0151

-17Exhibit 3
FINGERHUTS PRICE STRATEGY
Product Cost Comparisons1
Hamilton
Beach 48-oz 8speed Blender2
$49.99
$5.89/mo for
12 months =

Reebok
Satellite 2000
Cross-Trainer
(Mens)
$79.99
$8.89/mo for
12 months =

Eureka 9 amp
Pentium 233 MHz
Upright Bravo II
MMX Computer
Vacuum Cleaner
with color
with free hand vac Bubblejet Printer3
$99.99
$1,299.99
$10.79/mo for
$57.99/mo for
12 months =
36 months =

$70.68

$106.68

$129.48

$2,087.64

(Sears)
$19.99
(10-speed; does
not include
food processing
attachment)

(Sears)
$54.99

(Sears)
$69.99

(Circuit City)
$949.00
(266 MHz;
price is after
mfgr rebate)

PRODUCT
SOURCE
Fingerhut Cash
Fingerhut
Installment
Credit (includes
Shipping &
Handling)
Competitors
Price

(Prime Time
Rental)
$139.99/mo for
24 mo. =
$3,359.76

Information compiled in August, 1998, from current advertising circulars, catalogs, and Internet sources.
The Fingerhut model includes a food processing attachment, which consists of a work bowl with a 3-cup
capacity, and a food pusher.
3
Both Prime Time Rental and Fingerhut include a Canon color bubble-jet printer. Circuit City includes a
Lexmark color Jetprinter.
2