Will J.C. Penney’s New Business Strategy Positively Influence Sales?

Have you heard J.C. Penney is going to radically change its business strategy? The giant retailer is getting rid of its traditional sales in favor of low prices all the time, slashing many items by 40% or more! In addition, they’re going to do away with confusing pricing for a simpler approach. No more $14.99 items, they’ll be $15, and those $19.99 items you love will be a nice round $20 or $19. Yahoo Finance ran an article, J.C. Penney gets Rid of Hundreds of Sales, which gives more details on Penney’s new strategy and some of the reasoning behind it.

On the surface you might think this is great for the consumer but don’t forget, Penney’s isn’t doing this for customers, they’re doing it to help the bottom line. The company believes sales and profits will be stimulated by the new strategy of lower prices and simplified pricing. To help with the implementation, the company has brought in some heavy weights in the retail industry from Target and Apple. This is obviously no ill-conceived idea but I want to look at whether or not it will positively influence sales.

Let’s start with doing away with the “the sale.” The sale is as all-American as baseball, apple pie, and motherhood! People love a big sale because it makes them believe they’re getting a great deal and that makes the buying decision easier for the consumer.  When you buy something on sale, part of the purchase decision is triggered by the contrast phenomenon. While $26 might sound reasonable for a certain item, it looks really good when compared to the normal $45 price, and you know saving $19, more than 40%, is a great bargain.

The downside is Penney’s is losing the bang for the buck, so to speak, because there will be no higher price to compare to and thus create the desire to take advantage of the deal. Considering nearly three quarters of Penney’s sales revenue came during promotions last year where prices were slashed by 50% or more, you begin to see how much they could lose if this strategy backfires.

And what’s up with that pricing? Charging $39.99 for an item doesn’t fool anyone because we know it’s practically $40. Selling an item for $14.99 can’t possibly induce more sales than a $15 price can it? It sure can!

In William Poundstone’s Priceless: The Myth of Fair Value (and How to Take Advantage of It) he cites a study in which sales were tracked for an item which sold for three different prices: $34, $39, and $44. Unit sales were highest for the $39 price as was the total revenue. When the item was priced at $39 total revenue was 9.5% higher when compared sales coming from the $44 price. When the $39 revenue was compared to the $34 price, total sales revenue was a whopping 50.6% more than when the item was sold for less! There are different theories as to why sales tend to be higher for items ending in $9 or $.99, but one thing is undeniable – it works. If it didn’t work retailers would have abandoned the strategy a long time ago.

As noted earlier, with former Target and Apple executives this change looks like it makes total sense on the surface and the new strategy might work. But let me bring to mind something many of you probably remember, New Coke. The new flavor for the world’s best-selling soft drink was a well-planned, thoroughly tested idea. Because New Coke was preferred by a margin of 2 to 1 in blind taste tests over regular Coke, it was thought to be a sure thing when it hit the shelves.  After all, what could be better than improving the best-selling product in the world? And yet it was an abject failure, considered one of the 100 worst marketing ideas of the 20th century. And you know the rest of the story as New Coke gave way to Classic Coke, the old standby!

J.C. Penney’s new strategy may not have the same kind of response as Coke, but my gut tells me after the initial PR wears off, Penney’s will be no better off and perhaps worse off because it will have abandoned some of the psychology that goes into the buying decision for many consumers.

 

 

10 replies
  1. Anonymous
    Anonymous says:

    They'll crash and burn. Sales hype people up to get in the door and get in the door NOW. A monthly 96-page catalogue is going to end up in the trash.

    Also, I wonder how many people JCP laid off due to the change. Prior to this they had a pricing team which did mark ups/downs and a signing team which set all the prices for the sales. I imagine they could combine the teams into one (thereby eliminating one team) or add the responsibility to the sales team or the rest of the support staff and nix both teams.

    Reply
  2. Brian Ahearn
    Brian Ahearn says:

    Anonymous,
    Time will tell but I'm with you, the color catalog ends up in the recycle bin pretty fast. I'm sure with the change they reduced overhead (people) in certain areas because they were no longer needed.

    Brian

    Reply
  3. Anonymous
    Anonymous says:

    Penney's is keeping their layoffs a secret. Hundreds of people are let go and they are not given much notice. Pretty sad to treat their employees so bad after they have invested their lives into a company that does not appreciate them.

    Reply
  4. Anonymous
    Anonymous says:

    I think the catalogs they send out cost a small fortune, it would be better to pass on a better price to the consumer than waste it on paper. I also think the prices are higher in some areas. For instance my husbands New Balance sneakers were 49.99 and now 50.00 but my faux leather handbag went from 35.00 to 50.00. That to me is a very high jump when I can go to Stein Mart and get one in leather for 39.99 and also an extra 20% off coupon. They made a big mistake in my eyes and will not be seeing me in the store again. I shopped their every week because the sales/coupons were so good, now Macy's is cheaper. So here I come Macy's and Stein Mart…..

    Reply
  5. Anonymous
    Anonymous says:

    They have ruined a favorite store and the new guys will likely walk with big packages as it all goes down in flames.

    Reply
  6. Brian Ahearn
    Brian Ahearn says:

    Interesting follow up from an article called "Why we spend and what makes us do it" — "For retailers without such an identity, the struggle to reposition themselves can lead to risky strategies. For instance, JCPenney miscalculated shoppers’ psychology when it recently replaced its beloved coupons and regular sales with everyday low prices. Despite broad price reductions, confused consumers shopped elsewhere, and sales reportedly dropped 20 per cent at the U.S. mid-price department store chain."

    Read more here http://ow.ly/cvcx2

    Reply

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