What Retailers Can Learn From Penney’s (Failed) Competitive Pricing Strategy

Penney's painful, two-year-long fiasco regarding strategy, pricing, and customer reactions is bound to become a retail case-study for the Harvard Business School -- or maybe a movie -- wags Josh Lennox in RIS. Where did JCPenney go wrong? Competitive pricing strategy, say some. Confusing the customer is another. But the most egregious is that they didn't have a strategy says Roger Martin, Dean of the Rotman School of Management at the University of Toronto, Canada, in "Memo to JC Penney: Execution Is Not Strategy," (Harvard Business Review). 

Martin believes it was a huge mistake for Penneys to imply to their customers that Penney's old way sucked (Martin's words) -- and that Penneys was going to reinvent its stores. But Penneys didn't do a very good job of explaining this to people. This led to confusion, faithful customers who stayed away, and potential customers who didn't get the message. It's worth note that when Penneys began these changes, it had an already-existing customer base that provided $12 billion in current revenues, which was undermined by the new approach.  

What happened is that some new shoppers came in and bought from the tiny new boutique JCP spaces, but not consistently, while old customers stopped buying what they always bought at the old JCP.

Martin thinks the Apple store principles advocated by Ron Johnson, former Apple Executive / recently-replaced JCPenneys CEO, were no substitute for strategy. The story went that Johnson was a brilliant strategist brought in to entirely overhaul the strategy of JCP and make it shine like the Apple stores. At least that's what he thought he would do. (What’s More Important Than Competitive Pricing? Apple’s 5 Simple Secrets To Retail Success). But, under Johnson, "JCP had nothing even vaguely resembling a worthwhile strategy and its path to get to where it wished was comically disastrous."

Penneys would do well to pay attention to some of the following comments to Martin's article:

* JCP needs to understand how their customers really think. The psychology of JCP shoppers is a key: 50% advertised price and then further 20% discounts instead of a net price (as in low cost retailing) attracts those above 35 years of age who always are looking for ways to save… And, being able to use three coupons is heavenly.

* Penneys never came out and explicitly showed that they were courting younger customers, and so young people never found their way to the stores or even the website.

* JCP didn't identify a set of shoppers with whom it could winfor whom JCP was their best alternative, to which they would look loyally for their shopping needs. The "new JCP" boutiques, had merchandise in them that some customers found somewhat compelling some of the time, i.e. attracted a younger, hip crowd -- but left no reason for the old faithfuls to come into the larger store.

* JCPenney has to make decisions on whom to court -- find a balance between the couponers and younger professionals and college students, but it needs to strike the right balance between "New JCP" and "Old JCP" to make it work. Penney's needs to articulate why their "new self" will be preferable to competition.

* Penneys chased away existing business:  "I used to be an avid shopper at JCP when they had sufficient big and tall sizes. You can find big sizes in many places, but not many places carry tall sizes. My local JCP used to, but they opted to eliminate that area in favor of a boutique Levi's shop about a year or so ago. Haven't been back to my local store since."

Martin writes, if JCP doesn't figure out an answer to these questions, it will revert entirely to, what Martin calls, "the retailing drug — the low-price strategy."  Martin goes on to say that prices unaccompanied by low costs is an approach to liquidation (i.e. race to the bottom) — which is where JCP will be if it doesn't start to think intelligently about strategy.  

Bottom Line For Your Bottom Line:

Penneys, Martin says, needs what it always needed: A strategy. It needs to decide where it is going to play — with what set of shoppers -- in what range of merchandise -- through what physical and digital spaces -- and it needs to decide how is it going to provide a superior value proposition to competitive alternatives in that chosen space.  And it had better decide soon. The department store business is a brutal one. Penneys, struggling to get back on its retail feet, faces huge challenges with its competitive pricing strategy plus all the other problems in today's crowded, competitive, connected, forward-looking, real-time retail world.  

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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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