Carpe Diem

For J.C. Penney, a tough lesson in consumer psychology; consumers want the ‘thrill of the deal’ even if it’s an illusion

There’s a really interesting article in today’s NY Times Business Section titled “Sometimes, We Want Prices to Fool Us.” It’s about how the “everyday low pricing” model at J.C. Penney’s seems to have backfired. One explanation is that many consumers don’t necessarily want “fair prices” or “everyday low prices,” they instead want the thrill of getting a great deal when something is on sale, to feel that rush of “consumer surplus” running through their bodies! And sometimes those “deals” are an illusion, because the sales prices are heavily discounted from an artificially high price — but maybe we want “prices to fool us” as the title of the article suggests.

I think the J.C. Penney example illustrates how incredibly complex and unpredictable consumer psychology and behavior are. For example, consumers seem to accept everyday low prices at Walmart, Sam’s Club, and Costco, but that pricing strategy didn’t work at J.C. Penney. That’s why you have to sympathize with the challenging task of being a producer, seller, or retailer — they can’t ever perfectly determine consumer tastes and preferences, and therefore have to use a continual process of trial-and-error and experimentation to figure out what products consumers will buy, and at what price. Not an enviable position to be in, to be at the mercy of fickle and unpredictable consumers. Producers can’t ever really “get inside our heads” as consumers to figure out what we want and what prices we’ll pay, they just have to guess, and that’s why only a minority of new products and companies are ever really successful and profitable – it’s always a mysterious guessing game that’s hard to win!

Here’s an excerpt from the NY Times article:

Most shoppers, coupon collectors or not, want the thrill of getting a great deal, even if it’s an illusion. In recent months, Penney recognized that human trait and backtracked on its pricing policy, offering coupons and running weekly sales again. And it started marking up items to immediately mark them down for the appearance of a discount.

Simplifying pricing, it turns out, is not that simple.

For sellers, setting and holding one price makes plain, economic sense. “You’re always going in and changing prices and that takes manual labor,” said Ronald Friedman, retail practice leader at the accounting firm Marcum. “Also, if you have one price, you have a better feel for expected margins and gross profits, you can manage to your budgets a lot better, and it’s more efficient.”

It also leads to more stable inventories. “It makes the operations side of things much easier to predict,” said John T. Gourville, a marketing professor at Harvard Business School. “You don’t have these whiplash effects of selling, say, a ton of Diet Coke one week and virtually none the next week.”

Even Walmart, which actually does pull off the trick of “everyday low prices” in its domestic stores, is finding it hard to convert consumers to a single-price model in countries like Brazil and China, where retailers give deep discounts on a few main products, then mark up the rest, said Mark Wiltamuth, an analyst at Morgan Stanley.

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.

Just having a generically fair or low price, as Penney did, said Alexander Chernev, a marketing professor at the Kellogg School of Management at Northwestern University, assumes that consumers have some context for how much items should cost. But they don’t.

“J. C. Penney might say it’s a fair price, but why should consumers trust J. C. Penney?” he asked. “At the end of the day, people don’t want a fair price. They want a great deal.”

30 thoughts on “For J.C. Penney, a tough lesson in consumer psychology; consumers want the ‘thrill of the deal’ even if it’s an illusion

  1. Mark Perry: “That’s why you have to sympathize with the challenging task of being a producer, seller or retailer – they can’t ever perfectly determine consumer tastes and preferences, and therefore have to use a continual process of trial-and-error and experimentation to figure out what products consumers will buy, and at what price. ”

    Are you meaning that you sympathize with Ron Johnson, who arrogantly refused to even try to survey or to test market so as to find out what the JCPenney customer wanted? Conducting market tests is basic Marketing 101.

    According to former JCPenney staffers I know, Johnson made an even larger management mistake – one which was even more dangerous than his marketing error. Johnson never gained the commitment of the 120,000 employees he was charged with leading. They never believed in the changes Johnson was implementing, and Johnson never bothered to sell his vision to the huge workforce charged with implanting it.

    Ron Johnson certainly does not deserve our sympathy. His arrogance cost him not just his job, but also the jobs of thousands of JCPenney employees whose company he ruined.

  2. JC Penny’s problem is it really needs to be another Macy’s … except for the inconvenient fact there’s already a Macy’s. It’s other alternative would be to become a total discount retailer, but all those stores in existing malls – including lots of upscale malls – wouldn’t be particularly happy to have a discount retailer ruin their hip and upscale image.

    JCP is neither here nor there, but unfortunately, they need to be somewhere.

    • ^
      Oops, that should be “Its other alternative…” Don’t want to get on Mark’s grammar rant articles, now do I. ;-)

      • Unknown: “JC Penny’s problem is it really needs to be another Macy’s”

        I don’t think so. Macy’s and DIllards have always targeted a different segment of the population – the consumers who were a little more fashion conscious, who were willing to pay extra for the Hilfiger, Nautica, DKNY, and Lauren brands,

        JCPenney has for decades successfully targeted the value conscious customer. Not the lower end goods that Walmart sells but rather something in between. The problem has been that they allowed Kohl’s, TJ Maxx, Old Navy and others steal away these consumers.

        Ron Johnson was not planning to fight the erosion of the middle range shoppers. Rather, he decided to rebrand JC Penney’s as a Macy’s. His store-within-a-store has not been proven to work with mid-range apparel consumers, but that wasn’t going to stop him. Johnson arrogantly believed he could reposition a 110 year old brand without losing JCP’s existing customers.

        Had Johnson simply conducted market tests in a few select cities, he and his Apple cohorts would have discovered the folly of his vision.

  3. Years ago, when Macy’s bought May Company stores and brands all across the country, they converted all stores to the Macy model – with disastrous results. May Company stores displayed more choices at lower prices before and after discounts. Macy’s per store volume declined from sales attained by predecessors but Macy’s made no move except to cut their sales floor staffs.

    Strangely, JCP gained nothing from this Macy’s weakness – I suppose because their national brands are few and house brands prevail in their stores. In that regard they are more like Target (and Target is considered a lower priced spread).

    Here in the Midwest we have the Meijer grocery/dry goods mega-stores that do well with low pricing and Kohl’s department stores which have dazzled the discount shoppers with their Kohl’s Cash deals. Go figure.

  4. WalMart has mostly made the transition to low everyday prices though they still honor coupons and low price matches.

    there are still a good number of items that WalMart sells that are NOT the lowest price so a consumer needs to be shopping for selling price – not sale price and not assuming that WalMart does have the lowest price.

    Retail clothing has to be a nightmare of a business. You can get clothing anywhere now days for cheap… even decent clothing so why would anyone go to places like JCP or Macys’ anyhow?

    The ONLY time I go is at Christmas.

    Christmas is 1/2 or more of their season because while people will buy WalMart clothes for themselves they want a gift to be “special” so they pay a “sale” price for an outrageously priced item that was even more outrageously priced before the sale.

    Thrift shops in our area are totally overwhelmed with clothes.. as most Americans already have closets full of clothes and no more room for new stuff until they haul a load to Goodwill, etc.

    • Larry G: “You can get clothing anywhere now days for cheap… even decent clothing so why would anyone go to places like JCP or Macys’ anyhow?”

      But consumers are shopping at Macy’s, aren’t they? And before Ron Johnson decided to rebrand JCP, consumers were shopping there as well. In 2011 – before Johnson implemented his new vision for JCP – sales at JCP were only 4% lower than what they had averaged for the previous 10 years. It was only after Johnson implemented the new image that sales plunged 30%.

      • @johndewey – I pretty much agree with your assessment – at christmas.. which I think is about 60-70% of non-Walmart clothing sales.

        I’d agree that if you are shopping for “nicer” clothing to attend a wedding or similar that you’d find better than what WalMart offers.

        but I think also there are a bunch of players in that field and it is ever more volatile.

        I thought I had read that JCP was LOSING sales even BEFORE they started “tweaking”… rather than Johnson just coming in and screwing the pooch.

        no?

        • No, Larry. JCP was already recovering from the recession when Ron Johnson took over in 2011. You can check the JCP annual reports if you doubt me.

  5. The story of JC Penny (and now Wal-Mart, too) is really a great example of how dynamic and swift the free market is. JC Penny didn’t provide to customers what they wanted in the manner they wanted, and justice has been swift. There is no government intervention here. No committee in DC coordinated this. It is the actions of individuals, each pursuing his own self-interest, that brought this once mighty company to its knees. Creative Destruction at its best. This is the spontaneous order which so many don’t believe exists.

    It’s fantastic, no?

    • well… it does demonstrate that corporations that are not nimble and stay ahead of the trends – do get whacked – unless they have no competition.

      • well… it does demonstrate that corporations that are not nimble and stay ahead of the trends – do get whacked – unless they have no competition.

        And since there are no natural monopolies, that’s not an issue.

      • Larry G: “it does demonstrate that corporations that are not nimble and stay ahead of the trends – do get whacked ”

        What an uninformed statement! JCPenney is failing exactly because Ron Johnson tried to “stay ahead of the trends”. The JCPenney very large customer base shopped there because they felt comfortable with a more conservative and less expensive product offerring. Johnson brought in trendy merchandise and adopted trendy but controversial advertising. And the JCPenney customer base deserted him.

        • re: staying ahead of trends.

          let me try to rehabilitate my “uninformed” statement a little.

          okay, so he was TRYING to be NIMBLE and got too far ahead of the game – maybe.

          the question is – in the future – when the “dinosaurs” are no longer in the market for “fashionable” clothing, what will the younger generation want – in clothing – and in corporate support of “diversity” of lifestyles?

          Will they see corporate disavowment of same-sex marriage in the future the way most of us currently view corporate differential treatment of ethnic difference, e.g. Denny’s or Cracker Barrel?

          it could ALSO well be that the traditional business model of JCP is doomed anyhow – that in the future – the young will gravitate towards some different business model that recognizes that the “tradition” of “upscale” clothing is going the way of Top Hats and spats?

          I just don’t think the issue is as black and white as perhaps you do.

        • ….As a shopper who really loved the more modern design for younger (30s) professionals, AND the low prices, I only have one thought…what is going to happen when their customer base (older folks) aren’t able to shop there anymore?

          • re: “fooling” consumers with “prices”.

            geeze… does that mean most folks don’t know how much a good shirt SHOULD cost in the first place and they are relying on store advertising to help them decide the right price?

            GAWD O’Mighty!

          • geeze… does that mean most folks don’t know how much a good shirt SHOULD cost in the first place and they are relying on store advertising to help them decide the right price?

            How do you know what a good shirt is, and how do you know how much you must pay for one unless you know how much someone, or several someones, want to charge you for one?

    • Jon, I agree that in the past 18 months JCP did not provide its customers what they wanted. But the tragedy here is that one arrogant man forced an entire company to ignore its own customers. No, this story has nothing to do with government intervention. But I also do not see it as simple creative destruction. Despite what Larry is arguing, JCP was not failing two years ago. It was not growing, but it was providing $18 billion in goods each year for some very loyal customers.

  6. It is obvious to me that Ron Johnson had no clue about the JCP customer base. As my wife explained this afternoon, Ron Johnson alienated millions of customers who are opposed to gay marriage. On Mothers Day and on Fathers Day last year, JCP showcased real same sex couples with their children in its ads. Why would a retailing CEO want to place his company in the middle of this controversy?

    Everyone who has shopped in a Penney’s over the past 20 years – and I suspect Ron Johnson had not – should be aware of the retailer’s pro-family focus. How could Ron Johnson not realize that a significant portion of his conservative customer base would disagree with his personal position on gay marriage?

    • re: gay marriage…

      I don’t know John Dewey… I think the world is changing on this issue and perhaps Mr. Johnson got a little to far ahead on it but 20, 30 years from now that position is going to be a dinosaur of a position.

      Most young people are not on board with it.

      • LarryG:”I think the world is changing on this issue and perhaps Mr. Johnson got a little to far ahead on it but 20, 30 years from now that position is going to be a dinosaur of a position.”

        It may be a dinosaur of a position now, but that’s beside the point. Ron Johnson’s job was to increase the wealth of JCP shareholders – and definitely not to embroil his company in a controversy which put that wealth at risk.

        Both the leaders of Chick Fil A and of JCPenney alienated some potential customers with their positions on gay marriage. The big difference is that Chick Fil A’s leaders are the owners. Ron Johnson was risking other people’s money.

  7. Nobody who is trying to help J. C. Penney should buy this analysis without considering everything else that went on.

    Did anybody notice how drastically advertising from J.C. Penney changed after Johnson’s plan was put in place?
    The new advertising seemed to be aimed only at the very young. Also, it looked more expensive to produce while simultaneously containing less useful information about products.

    • I agree, Oswego. The advertising was apparently all part of Johnson’s plan to target a different demographic group than the one which had been providing JCP with $18 billion annual sales.

      Johnson’s may have included a change in the branded merchandise carried in the stores. My wife and I visited one of the transformed JCPenney’s yesterday. Rather than the familiar company-owned brands of the past, the store featured brands we would expect to see at a Dillard’s or Macy’s: Levi’s, IZOD, Arizona Jeans, Claiborne, Jonathon Adler, DKNY. Signs in the store announced the impending arrival of the trendy Joe Fresh brand. This was not the JCPenney’s of just a few years ago. Of course, as the former Apple executive brought in to run operations at JCPenney, Michael Kramer, had publicly proclaimed: “I hated the JCPenney culture.”

  8. Pretty sure retailers have known this forever, with how they have a ridiculous “retail” price for all goods and the lower real price. JC Penney’s management mistake may have been in assuming that psychology has gone away, at least for their customers. If customers want a “great deal” so bad that they’ll even take one that’s obviously made up, that’s what you provide to them. The market always delivers. ;)

  9. I never shopped at JCP before Ron Johnson’s new plan, and it was WONDERFUL to go in and pay a low price for decent career clothes. I just went in yesterday to see the new inflated prices – sure enough the first shirt I looked at had been 24.00 a few weeks ago, and was now 32.00 (though still less than Kohls markup for same shirt to 36.00). I asked the woman at the counter, and she said, matter of factly “Oh its because of the coupons. We had to raise the prices.” It may be the nature of the business, but it is embarrassing to know consumers are being fooled – AND KNOW they are being fooled…and are happier by BEING fooled. What? Oh, and 20% off 32.00 doesn’t make up the difference in mark-up….gotta pay for those coupons.

  10. I fell for the Johnson era JCP hook, line & sinker. Under him, JCP produced better merchandise, in better looking stores at lower prices. I don’t understand all the comments related to “trendy” or young. The new merchandise is very similar to the stuff I’ve been buying for years, and I’m well over 40.

    The media backlash is incomprehensible; for months Johnson dominated the Google business news headlines. I haven’t seen nearly as many headlines since he left. Interesting.

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