It isn’t ‘fair & square’ for consumers, it is ‘focus & simplify’ for JCPenney

This is a guest post by Praveen Rajasekar, an aspiring entrepreneurial product marketer pursuing MBA at GeorgiaTech.  This is his detailed analysis of pricing strategy change announced by JCPenney. See his full bio at the end of the article.

JCPenney (JCP) unravels a transformational plan attempting to change consumer retail experience.  Will its new ‘fair & square’ pricing strategy and month-long value promotions make it America’s favorite store? Perhaps, but it will depend on how effective these strategies are going to influence consumers in its target market.

Over the years, we as consumers have become accustomed to sales and discounts in retail stores. For some of us, buying a product on sale provides a sense of achievement. For others, it’s just common sense because you get used to the numerous sales and promotions. So the real question is will the new pricing and promotions at JCP change consumer buying behavior? An economist would say yes, with changes in price the quantity demanded changes. But as a marketer we are faced with irrational consumer behavior.

Marketers have long used pricing as a tool to signal quality. But with numerous sales and discounts, it may become counterproductive.  While prices ending in 0 are perceived to signal quality, based on the psychology of pricing, marketers have used prices ending in 9 to signal discount.  JCP has done away with $X.99 prices and has decided to round them to $(X+1).00 and has also limited the sales promotions to convey ‘We are a quality (not a discount) retailer’.

In addition, it has devised three types of pricing:

  1. Everyday prices – Regular prices, not everyday low prices.
  2. Month-long values –Better prices that change monthly based on seasonal needs.
  3. Best prices –Clearance-level rates on the 1st and 3rd Fridays of every month.
JCPenney Pricing Waterfall

It also promises consistent pricing strategy across all channels whether in-store or online.

What does this mean to us as consumers? Zero price discrimination. Wow, that sounds cool. But is it really enough to attract consumers? It depends.

Will we buy an IZOD shirt from JCP for $40.00 at their new everyday price or wait for it to be on sale at Macy’s for $34.99 down from $60.00 original retail price?

It depends on how quickly we need the shirt and whether we are willing to wait for a sale at Macys. Therefore JCP may not really win customers from its competitors overnight, using this pricing strategy. But, it has the potential to attract the customers who are in immediate need and are willing to pay the everyday prices. In addition, the new return policy allows customers to return any merchandise at any time for any reason and might provide JCP an advantage over its competitors.

Apparently for JCP, past promotions did not make a big impact on sales, as it ran 590 promotions in 2011 and the average number of customer visits was only four, which implies that 99% of the times customers ignored those promotions. Now, JCP has decided to simplify and provide month-long promotions instead of a plethora of other promotions provided thus far. This definitely provides a level playing field for all customers. But whether the price offered during that period is within the customers’ willingness to pay is something to watch out for, especially as retailers fiercely compete for market share by undercutting each other across both brick and mortar stores and online channels.

It is also critical to note the JCP with a slew of brands (including Martha Stewart® introduced at the launch event) is attempting to attract a wide range of customers. Some of whom might welcome the new changes while others still vie for more discounted brands. With such a broad spectrum of consumers in JCP’s target market it is unlikely to become America’s favorite in the near term. To do so would mean changing customer expectation of exclusive sales and deep discounts.

JCPenney’s ‘fair & square’ pricing strategy appears to be part of a bigger ‘focus & simplify’ retail strategy and logically doesn’t seem radical or game changing in isolation. But with the broad promotions and personality branding, along with the future suggested changes in products and retail stores, the strategy holds promise. Especially, if consumers start realizing that JCP consistently offers lower prices in comparison to its competitors, without the hassles of coupons. As Ron Johnson articulated in the conclusion of the launch event– ‘Every journey begins with a first step!

Related Posts:

  1. Price Realization – JC Penney Price Leaks
  2. Price Elevator – JCPenney on Loss Leaders
  3. Pricing starts with customer segmentation
  4. Price realization by GoodYear
  5. Black Friday Sale – Price Discrimination
  6. What if there were no price tags?

Bio: Praveen Rajasekar is an aspiring entrepreneurial product marketer. He has an undergraduate degree in computer science and engineering. After 6 years of IT consulting for Fortune 500 clients, he is pursuing full-time MBA at Georgia Institute of Technology, focusing on Marketing and Strategic Management. He is a Warren Batts fellow in the TI:GER® (Technological Innovation: Generating Economic Results) program, developing business plan and go-to market strategy for new research technology. He is an avid foodie and vivacious volleyball player.

What happens to the sweater from 6AM to 9AM for the price to double?

Sometime during many of the obligatory Thanks Giving conversations, an elderly relative loudly wondered about the mysteries of Black Friday pricing.

The sweater costs  $29.99 at 6AM but  if I buy the same sweater at 9AM it is $59.99. I mean, come on. It is the same sweater! What happens to the sweater  from 6AM to 9AM that makes it double in price.

She likely was just making a conversation. Or a philosophical observation expecting others to simply marvel at her astute comment that everyone else seem to have missed.

The answer is boring (I still have not mastered any party tricks on pricing to entertain people).

Let us limit the answer to the specific question and not mix it with loss-leader pricing.

Simple answer, nothing happens to the sweater. Yes, it is the same sweater. It is the mix of people (customer mix) that changes from 6AM to 9AM (or later).

As customers we all have different prices we think is fair to pay for the sweater. Here, by fair I mean the price that we willingly pay without feeling pain.  Let me use a very simple example with hard restrictions to explain why the price doubles from 6AM to 9AM.

Let us say there are only 100 people, numbered from 1 to 100. Each person is willing to pay a price that is less than and up to their number ( person numbered 10 willing to pay up to $10 etc).   Even if it is a penny less, they will buy the sweater at the price.

Let us also assume the sweater costs the store $9.99 to buy.

If the sweater is priced $59.99 all the time, all those numbered from 60 to 100 will buy it, netting a profit of $2050 for the store.

If the sweater is priced $29.99 all the time, all those numbered from 30 to 100 will buy it, netting a profit of $1420 for the store. Note that all those numbered  60 and above will still buy it at this low price (the difference between their number and the price they pay is heir consumer surplus).

(Higher price netting higher profit is just an artifact of choosing these numbers, and not because higher prices drive higher profits)

But what if the store can sell the sweater a $29.99 only to those numbered between 30 and 59 and sell  it at $59.99 to those numbered 60 to 100? They would make a total profit of $2650. (If one price is good, two seem to be better.)

The problem is these 100 people don’t show their numbers to the store and even if they did the store cannot force them to pay based on their number.

But what if there is a way to separate most of those of those in the 30 to 59 range from those in the 60 to 100 range? Conversely what if there is a way to keep most of those in the 60 to 100 range to pass on the  $29.99 deal?

One such way is changing the buying experience. Create enough pain in the buying experience , like asking them to skip sleep, wake up early and schlep to the store at 6AM, such that most (if not all) in the 60 to 100 range will find it not worth it, just for getting additional consumer surplus. That is why there is a 6AM deal.

Most in the 30 to 59 range will likely do that sacrifice to score the sweater at lower price.

It is not ideal. Not all numbered 30 to 59 will come at 6AM and some from 60 to 100 may sacrifice sleep and family time to come at 6AM. As long as there are at least 5 people numbered between 30 and 59 come at 6AM for every 2 people in the 60 to 100 range, the store will do fine.

So there you have it. That is  a simplified definition of price discrimination, customer willingness to pay and price versioning.

Try explaining this to your elderly relative.