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.