Lessons in Pricing Strategy from JCPenney

J.C. Penney Company Inc., founded in 1902, is one of the best known brand names in American retailing. The chain, commonly known as JCPenney, has historically been heavily dependent on promotions, discounts and sales.

JCPenney’s recent foray into and out of everyday low pricing provides important lessons for retailers and manufacturers evaluating pricing strategy.
If you are reading this post, then you probably know the basics about the chain’s struggles with pricing strategy. JCPenney has more than 1,000 mid-range department stores in all 50 states and Puerto Rico. The stores sell conventional merchandise, such as apparel and housewares. JCPenney stores often contain several leased departments such as Sephora, Seattle’s Best Coffee, optical centers, portrait studios, and jewelry repair.

JCPenney’s New Pricing Strategy

In 2012, JCPenney, under the leadership of new CEO Ron Johnson, who had run stores at Apple, undertook a significant change in its pricing strategy. The new pricing strategy eliminated promotions and focused on selling recognized brands. Under the prior promotions-based pricing strategy, prices were marked up so there would be room for promotional discounts. By contrast, the new “Everyday” pricing strategy set prices lower, eliminating or reducing the need for what used to be sale prices.

There were other changes as well. For example, prices no longer ended in 9 or 7 (such as $9.99); instead, whole figures were used when pricing items. Also, price tags now showed just one price and no longer listed the “manufacturer’s suggested retail price,” which had previously provided a higher comparison price illustrating how much the product could be sold for elsewhere.

The retailer also made significant changes in merchandise assortment. JCPenney focused on mini-stores within larger stores, such as those for Martha Stewart products. Note: JCPenney has been in a court battle with Macy’s over the right to sell the Martha Stewart “JCP Everyday” line of home goods. The trial underscores how competitive the middle-market home goods category is and how one brand like Martha Stewart can matter. Read more.

Back to the Future for Pricing Strategy

As you have no doubt read elsewhere, the new pricing strategy never gained traction with consumers. Sales declined steadily over time. The chain lost $3.3 billion in sales in the first year of Johnson’s turnaround plan. Its net loss in the quarter ended Feb 2, 2013, widened to $552 million from $87 million a year earlier. Annual revenue slid 25% to $13 billion, the lowest since at least 1987.

Under pressure, the CEO announced the company would move away from the “Everyday” pricing strategy and return to coupons and weekly advertised sales. The change came too late for Mr. Johnson, who left the company in early April 2013, at which time the prior CEO returned.

Lessons from JCPenney for Pricing Strategy

JCPenney’s experience with a non-promotional (or Everyday) pricing strategy has many lessons. In my opinion, these lessons include the following:

1. An Everyday pricing strategy is greatly helped by unique merchandise or very low prices.
   Everyday pricing is particularly hard to execute well for JCPenney, a retailer that sells many products that are not unique or special. High-end brands with more unique merchandise may be able to operate with fewer sales and promotions, but JCPenney primarily sells products that consumers can find at other retailers either in identical or similar form. For example, a non-promotional pricing strategy is easier to execute at Apple Stores, which has the advantage of selling Apple products.

   A pricing strategy built around everyday low pricing may work where a retailer is built from the ground up. For example, Walmart is built to offer low prices, and has engineered elements such as infrastructure, logistics, and merchandise to support these low prices. JCPenney does not have the service and merchandise of Nordstrom, nor does it have the low cost structure of Walmart. Instead, it is stuck somewhere in the middle, which provides a dangerous place for positioning, and a difficult place for everyday pricing strategies.

2. Over time, shoppers can be trained to expect sales events.
   Consumers are very smart, and are very good at learning what to expect from a retailer or a manufacturer. During more than a century of history, JCPenney offered a high-low pricing policy, in effect training consumers to expect sales events and attracting consumers who love sales. By eliminating those sales events, JCPenney took away a reason for consumers to shop the store.

   It is possible that over time a new group of consumers would become attracted to JCPenney, who were less promotionally oriented, but this can take a long time. It is also possible that the chain would re-train consumers to become less promotional, but this process is even more difficult for a chain that has spent a long history attracting consumers who expect promotional pricing policies.

3. The change eliminated reference pricing for consumers.
   Yet another reason the “Everyday” pricing strategy encountered difficulty is because JCPenney eliminated the manufacturer’s suggested retail price from its price tags. This suggested retail price may have offered what marketers call a “reference price.” Some consumers use reference prices to judge quality and value; without reference prices, consumers may have had a hard time judging the value of JCPenney’s merchandise, which was often undifferentiated. (Also, by switching from prices that end in “9” to prices that end in”0”, could the chain have lost another signal that the prices are discounted?)

JCPenney has changed pricing strategy, but its future is unclear

JCPenney has now added back reference prices for their Arizona store brand items, so they will again show comparison prices from other retailers. In his first big move, the new CEO tapped $850 million from a credit line and announced the company was looking into other ways to strengthen JCPenney’s balance sheet, and provide breathing room to develop and execute a new plan.

The new credit may lend JCPenney enough time to re-boot. However, the fates of Kmart, Sears and Circuit City are a reminder that the odds against JCPenney succeeding as an independent entity are low. Then again, retailing is fascinating in part because it is so unpredictable.