We, the customers, want prices to fool us
When the board of JC Penney ousted its chief executive, Ron Johnson — news that broke last Monday — you might say it was, in some small way, because he didn’t understand Tracie Fobes.business Updated: Apr 14, 2013 21:55 IST
When the board of JC Penney ousted its chief executive, Ron Johnson — news that broke last Monday — you might say it was, in some small way, because he didn’t understand Tracie Fobes.
Fobes plans meals around discounts offered at the grocery store and always checks coupon apps on her cellphone before buying clothes.
When, a little over a year ago, JC Penney stopped promoting sales and offering coupons and instead made a big deal about its “everyday” low prices, Fobes stopped shopping there.
It wasn’t that she thought the prices were bad; she just wasn’t having any fun.
Most shoppers want the thrill of getting a great deal, even if it’s an illusion. JC Penney acknowledged that human trait and backtracked on its pricing policy, offering coupons and running weekly sales again.
But the switch came too late for its numbers — sales dropped 25% in 2012, to $13 billion — and too late to help Ron Johnson.
Penney’s failure to wean consumers from sales and discounts probably won’t stop retailers from trying to simplify pricing in the future. For sellers, setting and holding one price makes plain, economic sense.
“You’re always going in and changing prices and that takes manual labour,” said Ronald Friedman, retail practice leader at accounting firm Marcum.
“Also, with one price, you get a better feel for expected margins and gross profits, you can manage to your budgets a lot better.”
Johnson pushed a similar logic when he moved the chain toward simplified pricing. He said that in 2011, the company had held 590 sales; almost three-quarters of the stuff it sold was marked down 50% or more.
But — here’s the rub — customers weren’t actually paying less. The prices had just been raised, and then discounted during promotions. Why keep playing this expensive game of double-bluff, he argued.
Macy's got a similar brilliant idea in 2006, but it abandoned that strategy within the year.
The problem, economists and marketing experts say, is that consumers are conditioned to wait for deals and sales, partly because they do not have a good sense of how much an item should be worth to them and need cues to figure that out.
"JC Penney might say it's a fair price, but why should consumers trust JC Penney?" asked Alexander Chernev, a marketing professor at the Kellogg School of Management at Northwestern University.
"At the end of the day, people don't want a fair price. They want a great deal."
A lesson that Ron Johnson might have profited from. But it is still not too late for other retailers. NYT
First Published: Apr 14, 2013 21:54 IST