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.

Loss Leaders That Drive Higher Customer Revenue

I used JCPenney’s as a case study for explaining pricing waterfall and price realization. One could read that chart as ineffective price realization but the only message one should read from that chart is how different promotions affect the pocket price. Why would a retailer be doing this heavy promotion? They could be focusing on “per customer revenue” and using mattresses as loss leaders.  For instance take a look at this new pricing chart that reverses the waterfall.

Effect of Loss Leaders  On Per Customer Revenue
Effect of Loss Leaders On Per Customer Revenue

The chart shows not the average revenue but the possible revenue for a single customer who might purchase all the extras. This does not mean every customer makes all these additional purchases. JCPenney probably has years worth of data on customer purchases that tells them the percentage of customers (who buy mattresses) buy the extras and carry a balance on their JCPenney credit card.

The bars in black are high margin sales. Here are the additional revenue opportunities:

  1. Warranty: JCPenney sells a warranty on warranty that comes as a 10 year supply of mattress pad. They give one mattress pad at the time of purchase with the promise of free replacement for the next 10 years.
  2. Bed-In-A-Bag: Customers buying mattresses are most likely to be interested in buying new sheet sets etc.
  3. Room Accessories: Why not change the curtains in the room as well?
  4. Interest Income: Some of the customers who has or open a new JCPenney credit card may carry a balance and hence paying interests.

Together all these components increase per customer revenue from $630 to $1173, still lower than the list price of $1699 seen for the mattress but that could easily be a marked up price that no customer would ever pay. The net is the low sale price on mattress (loss leader) help to improve money spent by the customer during a visit.