Don’t touch that pricing dial

Until a few months ago this is how JCPenney’s prices looked like. I show actual numbers in this chart for one product but you can take that model and apply to all their SKUs. Lots of red bars.

Starting with a high price with many discounts applied to it, leading to a low pocket price. Sales, coupons and free cash were the only way they were bringing shoppers into the store. All these meant signficant price leaks. When the entire marketing strategy is based on discounting and coupons the word waterfall assumes literal meaning.

When their CEO, Mr. Ron Johnson, of Target and Apple fame, took over he decided to plug all those pricing leaks.  Within a few weeks of taking over he put an abrupt end to this practice by going to what they branded as “Fair and Square” pricing.  No more markdowns, sales, coupons to clip or cash backs – one price.

As I have written before, effective pricing requires effective pricing communication. By branding the new pricing strategy (Fair and Square), changing the JCPenney logo to square and by running social media and Ad campaigns (some of which made it look like coupon clipping is a pain-point for customers) JCPenney did all the right things with their change.

All is well in the retail land? Did the Apple retail store magic rub-off on JCPenney?

JCPenney’s stock has taken a beating, dropping 20%, since it announced its last quarter earnings. Its revenue dropped 19%. Just for this quarter it reported a loss of $160 million.

Was it a bad decision to give up on discounting and move to Fair and Square pricing? Are the pundits right about pricing, that lower prices and greater service are the ways to profitability? Before the knives come out against the pricing move, ask this key question.

Where do you start for addressing your pricing problems?

This is not new to you if you have been reading my blog. I posed this question and answered it some time back. To set or change pricing you start with your target customers and understand why they are hiring your product. In the case of JCPenney, they had a perfect execution of pricing change skipping this first step.

Johnson hasn’t clearly defined who his target customers are and how he can get them to shop at J.C. Penney, says Craig Johnson, an industry consultant.

If you do not know your target segment (they likely are not Target’s or Apple’s segment and likely are not hiring JCPenney for reasons they were hiring Target or Apple) you cannot change your pricing strategy. You can apply pricing tactics or tweak it but not set your entire strategy.

The most important question in marketing comes from Clayton Christensen, “What job is your customer hiring your product for?”

“The problem with J.C. Penney is that people aren’t sure what it stands for anymore.  Even the new brands that Johnson has brought into the stores lack both a wow factor and a cohesiveness that would define who should be shopping there.”

Hence the results.

What does this mean to you as a marketer or a startup founder? I see several popular articles extolling the virtues of increasing prices and starting with higher prices. After all, “more money from fewer customers“, seems to make sense. Before you go  down this path, take a lesson from JCPenney.

Don’t touch the pricing dial before you understand your customers and their needs.

But, you are the pricing guy …

Someone: How do you think we should price this?
Me: I don’t know.

Someone: Don’t you think we should give it for free and sell services?
Me: I don’t know.

Someone: Should we give them a Standard and a Professional option?
Me: I don’t know.

Someone: Should we include this feature in our Standard edition or introduce a higher edition?
Me: I don’t know.

Someone: But you are the pricing guy, don’t you know what should be the price?

I don’t. I do not have a way to simply listen to your product pitch and come up with a price, let alone two prices. My pricing skills have not reached the level in which seeing a product makes the figure pop up in mind.
Except in extreme cases, like I did with Xoom, I do not know right away whether your prices are correct are wrong.

You will be disappointed. I do not know the pricing unless I get answers for 20 other questions. I need to collect data, run models, and even after that I still state my answers couched in uncertainties.

Anyone doing otherwise is either Steve Jobs or is leading you down the wrong path. We all know Steve Jobs is not with us any more.

I am the pricing guy and I am proud to tell you I don’t have easy answers for you.

What is the value of getting most likely correct information over getting easy answers?

How important is it for you to know how to go about defining the pricing and hence know how to change it as market conditions, competition, customer mix and technology change?

When Customers Come Calling

Not all of us get 3000 customers come calling (may be they do and we do not recognize it).

Domenico Martini is a truck driver in Italy, he used to deliver food for supermarkets when new customers came calling – about 3000 of them:

Each with a set of special requests

  1. Many wanted a discount on what traditional couriers charged;
  2. Others wanted meals to arrive in time for lunch.
  3. Some have asked him to linger at the delivery site to gather intelligence on their children’s new lives.
  4. Others demanded his cellphone number.

Listening to the different needs enabled Martino  to design and deliver them a solution at a price they are willing to pay.