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.

https://twitter.com/tweetpraveen


Pricing When Cost To Serve Is $0

What do amusement parks, airlines, hotels, baseball games, and  theaters  all have in common? Two things, first their capacity cannot be stored for future use and second the cost to serve one additional customer (marginal cost) is $0.  Once a plane takes off, all the empty seats in the plane expire, generating no revenue for the airline. How should a business price its service that falls in this category? Just because the marginal cost is $0 and the lost revenue opportunity should the excess capacity be sold at the lowest possible price?

There is a renewed focus (in the echo chamber of blogosphere), almost an obsession, with marginal costs and the fact that it is “spiraling to $0” for digital goods. Wired magazine editor, Mr.Chris Anderson, has been talking and writing about this and has a book coming in July. Before we go further I would  like to reiterate that what it costs to produce a product/service does not matter in how it is priced and higher capacity utilization is not a valid reason for lowering prices.

The answer to the pricing question lie in:

  1. Opportunity Costs: The cost to consider is not the marginal cost but the opportunity cost of admitting one additional customer – that is what is the lost revenue opportunity from selling one airline seat now at a lower price. Only airlines excel in implementing this pricing strategy that is based on yield management.
  2. Value: That said, the business should look at the value created for the customer using the service. It is common sense that a business makes profit not just by creating value but by capturing some of it.  Note that the value created is different for different segments (technically it is different for each consumer but it is hard to quantify).
  3. Reference Price: Businesses must consider the impact of low (or zero) price now on future profits due to the reference price effects. Once an airline sets a very low price or allows a customer to travel free because the cost is $0, then it risks setting a very low reference price in the minds of customers.  In the future, such customers will despise paying regular prices and may even be up in arms. The effect of reference price cannot be understated, despite the value added to consumers the reference price prevents the business from capturing a fair share of the value added.

Do you know your opportunity costs, value created and the reference price? Please use trackbacks to comment on this.