Lessons from the initial failure of J.C. Penney's new pricing strategy. You must understand your customer's price conditioning and experiment.
At one time or another, we have all fallen victim to a store’s advertisement of the “Biggest Sale Event Ever”. We’ve found ourselves looking at a shirt originally marked $50 and buying it for $25, because that seems like a good deal – who doesn’t love 50% off? Even though this tactic has worked so well for businesses in the past, J.C. Penney made a bold move in January to rid their stores of all discounts, sales, and coupons for “fair and square” pricing. Unfortunately, just like that $25 shirt wasn’t really a bargain, J.C. Penney’s new approach hasn’t worked out quite yet, leading them to get even bolder with theirpricing strategyin the next few weeks. Let’s dig into the years of pricing science they’re flying in the face of and see what we can learn:
Traditional retailers utilize promotional, fake, and anchored prices
To better understand J.C. Penney’s shortcomings, let’s first examine how a typical retail pricing strategy breaks down. For years, retailers, no matter what time of day or year, have offered sales and advertisements that lure bargain-drooling customers in the doors. Retailers use a combination of promotional pricing, fake pricing, and price anchoring to form a comprehensive psychological pricing strategy that creates a pricing trigger that minimizes the sales cycle significantly. For instance, when faced with a 60% off, 12 hour only coupon that reduces a $1,200 winter coat to $400, you can’t help but rush to the store to buy it, even if it is 95 degrees out.
A few things are happening here. For one, the $1200 acts as an anchor price that psychologically forces you to realize you’re getting an enormous deal at the $400 price point. Plus, the promotion limiting the time the offer is available forces you into an impulse. In actuality, you’re not that special, because these sales never truly end. Almost no one ever pays full price. In fact, studies show that people are much more inclined to pay $25 for an item valued at $50, than paying for the same item without a sale at $25. It’s all about the “price framing” of a product that creates a perceived value, which all leads to the excitement of getting a good deal
WARNING: Those last two links are to some reaaaaal nerdy stuff, so if you want to read some work from the Larry Bird and Michael Jordan of Price Economics click through. If you do end up reading one or both, then let us know by tweeting to @priceintel with the hashtag #TalkNerdyToMe.
You need to understand your customer’s price conditioning
So, where did J.C. Penney go wrong? Well, while we admire their attempt to change, they attempted to destroy over a century’s worth of price conditioning consumers have been through with department stores and pricing in general. They weren’t completely off base, as consumers with more and more access to information (comparison shopping engines, consumer reports, etc.), are beginning to realize that the value of products is determined much differently than a sticker would suggest. Yet, assuming that most soccer moms (and dads) wouldn’t fall prey to the colorful print ads tucked within the comics section in the Sunday paper, overlooks how much the majority of consumers value “winning” the retail game. Simply, deflating the perceived value causes customers to value the actual product less.
With a 20% sales drop, J.C Penny’s flight in the face of traditional retail pricing, has failed, at least in the short-term. CEO Ron Johnson insists that the company will continue with this method, even though experts expect the retail chain to gradually return to offering frequent sales and promotions.
What can your business learn from a retail price experiment gone awry?
We’ll be tracking J.C. Penney’s trajectory closely as they continue to iterate on their pricing strategy, but their initial failure can teach you the following, regardless of what you’re selling:
1. You need to understand what motivates your customer. If they are conditioned to using discounts, coupons, and promotions, then send them offers. If they know the strike-out price on your website is just a game, then don’t patronize them with one.
2. It’s ok to experiment with your pricing strategy. J.C. Penney’s bold move could have paid out significantly within a different context. Take Everlane, for example, a company that calls out exorbitantly priced clothing basics and sells everything at a flat rate under $100.
3. Communicating price changes is key. J.C. Penney heavily advertised the concept of their new pricing strategy, “Fair and Square Pricing,” but when their implementation involved color categories, flow-charts, and was anything but simple. If you’re making price adjustments, make them easy to understand, and your customers will follow.
For more on pricing strategy, download our Pricing Strategy ebook or speak to one of our analysts.