Pricing Experts: What Retailers Should Do With Their Pricing Strategy To Avoid JCPenney’s Pitfalls

Three days ago came the latest low in Penney's "race" to the bottom, when former Target Executive, Michael Francis, who was brought in to help redefine the marketing of Penney's brand as well as manage merchandising and product development, resigned suddenly. The department store chain has been scrambling to reverse a sharp drop in customer counts and plummeting sales after CEO Ron Johnson's new pricing strategy implemented February 1 -- would do away with hundreds of sales events.

Apparently, the customers didn't "buy" it. Recent months saw a sharp drop in customer counts plus dropping sales after the new pricing strategy had the opposite effect of turning off customers, who apparently like coupons and big markdowns, reports AP Retail Writer, Anne D'Innocenzio

"The plan is out of touch with shoppers' current mindset; big mistake in articulating the new image and policies," observed one analyst. "(We)… didn't do a good job of explaining the pricing change in a way that customers understand yet," said CEO Johnson, "it's just been kind of confusing."

I take no pleasure in Penney's problems, but let's see what the consumer is saying by rejecting Penney's new pricing policies and what pricing experts say to do to avoid Penney's pitfalls:

It seems the customer likes the thrill of the chase; "the hunting and gathering" as one wag said. This shows that a discount off a higher price is more inviting than an every day low price, even if it's the same final price in the end!

The department store chain got it wrong when it announced its new "no sales" pricing strategy in February, says Carol B. Phillips, marketing instructor Notre Dame University. The strategy, which emphasizes low everyday prices rather than deep-discount sale prices is a fundamental misread of the current consumer mindset, she says. Buying behavior now is qualitatively different. Bargain hunting is now like playing a game, and finding deep discounted goods on sale is part of the game…The key for JCP is to find a way to make those sales feel like more fun -- and efficient. 

I asked Upstream Commerce pricing experts: "What does Penney's situation mean for strategic positioning and pricing for retailers?

Mark Stiving says:

I hoped/predicted that JCPenney would succeed -- because they were doing something different than their competition. However, now we need to look at this as a large expensive experiment that shows all of us what not to do. The popular conclusion is that shoppers prefer or are addicted to large discounts, even if they know the price was marked up. However, Walmart does well with EDLP. So it is probably the case that they are having a hard time letting people know and getting them to believe that JCPenney really does have lower prices.

As to online retailers, the key lesson is pick your "Price Brand" and don't try to change it. EDLP can succeed. Deep discounts can succeed. If you are building a long term relationship with your customers they need to know how you behave, and they can tell. (Mark can be reached at Twitter using @MarkStiving, and see Mark's recent blog post, Understanding Your Company's Price Brand).

Jon Manning says:

Are commentators making a verdict too early? Probably, but it's not looking real good at the moment, especially with the departure of former Target executive in the last day or so, but here are some of my thoughts:

Never leave the CEO in charge of pricing: let the professionals deal with it. JCP is not Apple. Culture is hard to change: JCP's customers subscribed to the culture of discounting (75% of stock sold at 50% off, 590 sales in 2011- that's nearly 2 per day!!!), and that culture looks like it's going to be almost impossible to change, especially in these difficult economic times.

Perhaps the Penney's example should be viewed as a long-term strategy? Remember, Netflix's Reed Hastings was a villain after their disastrous price change, but look at what's happened since: Revenue per Subscriber up 11.9%, Quarterly Revenue up 10%, Profit Contribution up 15.4%. Netflix' share price hasn't recovered yet though.

Penney's probably haven't been holistic enough: seems to be all about footfall customers, rather than a more holistic omni-channel pricing strategy.

Maybe they should have re-branded as well.

So should Penney's roll-back their pricing strategy? Very good question…they are being punished by customers and Wall Street. They will have to do something, but they probably don't want to roll-back to where they were at the beginning of this latest free-fall.  (Jon is Upstream Commerce's "Resident Pricing Expert"; you can also Follow Jon on Twitter). 

Reuben Swartz says:

Know your customer and your product. Why would you take a high-end retail concept targeted at consumers who want to pay a premium for value, and target it at a mid-market store without differentiated products, whose customers like bargain hunting? They may still be able to pull it off but they forced pricing out front of the rest of the experience. (Follow Reuben at Twitter or his company, Mimiran).

Thanks, Mark, Jon and Reuben.  I'd like to hear your, the viewers', views of what happened at Penney's and what you would do about it.  Or, send your questions, and we'll have our experts answer them for you.  Thanks.  Gilon  

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Gilon Miller, CMO

About Author

Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.
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