How can I offer $140 shirt for only $39.50?

I received an Ad insert for Charles Tyrwhitt shirts with Saturday’s WSJ. Yes, as a matter of fact I still get the real paper newspaper, but we digress.

The Ad offered all kinds of dress shirts for a single price of $39.50 (normally $140 to $160). The Ad, speaking in the voice of the shirt company founder, then poses the question you see in the post title and answers it for us.

As expected the answer starts with cost, “because our buyers are great, we deal direct and no middlemen”

You can see at play some of the behavioral pricing tactics – price anchoring  with stated high price and signaling great value with marked down prices. Besides the  tactics the explanation does not answer the original question. In fact that is not the right question at all.

If the cost argument is accurate, then the question a customer should ask is,

How is it a shirt that likely costs less than $39.50 to make is normally priced at $140-$160?

As a regular reader of this blog and a fellow practitioner of value based pricing you may be tempted to answer this pricing question  with,

“because there exist a customer segment that is willing to pay that price for whatever job they are hiring the shirt for”

Unfortunately it is not the case with apparel pricing.  Pricing is not as sophisticated as you believe it is. It is steadfastly stuck in the land of cost based pricing with standard markups.

The data for this comes from an article in WSJ that analyzes pricing of $155 polo shirts. Almost the same, down to the sub-category level and price point.

The article does a marvelous job of marginal cost analysis. Most articles on cost analysis commit cost allocation error – allocating a share of all fixed costs to every unit made. This analysis gives us a true marginal cost of $29.57 for a polo shirt. We won’t be far off to assume that Tyrwhitt shirts have the same cost structure.

Then we see how they arrive at $155 price tag,

Using standard industry markups, the MacLanes set the wholesale price for the women’s polo at $65 and the retail price at $155. (Retailers in the U.S. mark up wholesale prices of ready-to-wear by roughly 2.2 to 2.5 times.)

Here are your answers for both the original wrong question and the right question.

How can a producer offer a $140 shirt for only $39.50?
Because it likely  costs them less than $39.50 to make one so they can still make  profit per unit and the $140 price is based on wholesale and retail markups.

How is it a shirt that likely costs less than $39.50 to make is normally priced at $140-$160?
Because of the antiquated way of setting wholesale and retail prices of apparels.

It is one thing to charge four  or forty times the marginal cost based on customer willingness to pay (Apple) but to charge four times the marginal cost based on standard markups  is …

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.

Pricing – Strategy and Tactics

Pricing is about profit maximization. A business must take all actions required to deliver long term  profit growth. Market share goal is secondary and is relevant only if it is essential to deliver long term profit growth. Pricing has both strategic components and tactical components, the latter is relevant only within the scope of the chosen strategy.

Strategy is about making choices – choices about the markets you want to play in, segments you want to serve and channels you want to use to reach them. If there are unlimited resources you do not need a strategy, you can play in any market you choose. But the reality of limited resources requires to make choices. Pricing strategy is flows from the overall marketing strategy of segmentation and targeting.

Tactics are designed to take advantage of short term situations, like promotions and other methods that rely on consumer behavior. For example, deciding whether to sort the price list or keep it random, whether to list items with $ sign or not (Cornell report, Yang, Kimes,Sessarego, 2009) and whether to have prices that end in  9. There are also more advanced statistical methods like the one from QCue.

The problem occurs when the marketer tends to focus more on tactics at the expense of strategy or worse apply all tactical optimizations to fix strategic shortcomings. The Cornell Hospitality report I quoted above reports on customer acceptance of higher prices when the prices are listed as just numbers without the $ sign. There are also other consumer behavior methods based on anchoring (and reference price) that increase customer willingness to pay. But if the restaurant does not understand the customer segments it is targeting, does not know the value/benefit added to its customers and does not have competitive advantage then any number of tactics employed in menu pricing will not stop its failure.

Tactics help you achieve precision but there is no point in being precisely wrong.