Entering content area for Canvas for the Innovative Mind

blog posts

  • Comparing Apples and Pennies

    J. C. Penney has embarked on a new pricing strategy by eliminating the constant discounting with its version of everyday low prices. Initial results are dismal. The number of people coming into J.C. Penney has dropped by 10 percent and sales have fallen by an average of 19 percent.

    The new pricing strategy is the brainchild of Ron Johnson, the current CEO of J.C. Penney. Mr. Johnson’s track record is impressive. He developed Target’s “cheap chic” positioning and also oversaw Apple’s retail strategy. As such, observers had high hopes for J.C. Penney’s fortunes.

    Why the change in pricing models? It is conventional wisdom that price discounting is detrimental to brand equity. More importantly, there were more than 500 different promotions a year, yet the average customer made only four visits before the pricing model change implying huge inefficiencies. Something had to change at J.C. Penney. While the jury is still out on the J.C. Penney experiment, there are some lessons that are clear from this exercise so far.

    Understand the job that the customer has hired you to do: The rationale for the new pricing model is obvious from a rational “economic” viewpoint. But a consumer-side examination reveals a different “psychological” viewpoint. Were J.C. Penney’s customers buying products or were they shopping at Penney for the thrill of the “bargain” hunt? How can consumers evaluate a bargain when there is no discounting? If this thesis is indeed true, then the new pricing model is NOT doing the job that the customer wants to do. In fact, it is an implicit betrayal of what J.C. Penney has stood for and they are paying the price.

    Pay attention to the pace of your change initiatives: For years now, J.C. Penney has trained customers with its discounting practices. Less than 1 percent of Penney’s merchandise was sold at full prices in the previous model. All of a sudden, Penney changes its pricing strategy and expects consumers to change their behaviors overnight. Discontinuous change is shocking to customers and they tend to walk away because they do not recognize the new entity. Any change must have been gradual so as to provide J.C. Penney’s customers time to adapt to the new model.

    Embed the new into the old: J.C. Penney should have  introduced the new pricing model to co-exist with the old for a while. For example, they could have created an island in the center of the store wherein the items were not discounted. This strategy would have weaned customers off price-discounting and enabled them to see the true value of Penney’s products. Worst case scenario, J.C. Penney could have evaluated whether this “no-discounting” strategy made strategic sense.

    The pricing model change at Macy’s did not work. So it is no surprise that this model did not work at J.C. Penney as well. Did Mr. Johnson’s stints at Target and Apple cloud his world view? Target and Apple had unique products that gave them pricing power. If J.C. Penney wants to get away from the price discounting strategy, they need to deliver unique product offerings that stand out. Then pricing power would follow.

    Raj Echambadi
    Professor of Business Administration and
    James F. Towey Faculty Fellow and
    Executive MBA Academic Director