Tracie Fobes, runs Penny Pinchin’ Mom, a blog about couponing strategies.   She plans meals around grocery store discounts and checks coupon apps on her cell phone before buying clothes.  When J.C. Penney stopped promoting sales and coupons last year, and switched to its “everyday” low pricing strategy, Ms. Fobes stopped shopping there because she said it wasn’t fun anymore without the rush of using coupons.

Most shoppers want the thrill of getting a great deal.  J.C. Penney recently recognized this human characteristic and returned to its traditional pricing policy offering coupons and weekly sales again.  The switch happened after Penney’s sales dropped 25% in 2012.

Sellers are motivated to set prices at one point because it is easier to manage budgets, reduces labor costs associated with sales, and leads to more stable inventories and better operations planning.  Ron Johnson, the former CEO of J.C. Penney preferred the everyday low pricing model because of the aforementioned benefits. In the previous year before Johnson’s arrival, J.C. Penney had held almost 600 sales events and almost 75% of merchandise was marked down 50% or more.  However, customers weren’t actually paying less.  J.C. Penney was just raising the prices that customers saw on the racks and then discounting them during promotions.

Even though an EDLP strategy seems to be a huge problem solving solution for retailers, it hardly resonates with customers.  Even Walmart has a hard time converting customers to a single-price model in countries like Brazil and China. The problem, according to pricing experts, is that consumers are hard wired to wait for deals and sales.  Most customers don’t have a good sense of how much an item should be worth to them and they wait for the market to give them cues to figure that out.   An EDLP strategy makes the erroneous assumption that customers have an idea of how much items should cost, but they generally don’t.  Consumers use the “regular” price of an item as a reference price and only assume that they are getting a good deal based on the difference of the reference price to the actual price they paid.

Simple low pricing strategies are most effective for companies like Costco who rarely holds sales or adjusts its prices.  Customers at Costco don’t see a lot of variable pricing on individual items, but notice a low price for their entire shopping basket.  Penney did not make its strategy clear for customers.  It offered low prices, but not the lowest prices.

Discussion Questions:

1. Why didn’t J.C. Penney’s pricing experiment work?

2. How does a reference price or anchor help consumers make purchasing decisions?

 

SOURCE: Stephanie Clifford and Catherine Rampell, New York Times, April 13, 2013