JC Penney’s New Pricing Strategies Will Work – Here’s Why

Wow!  Where to begin?  The details and some data can be found in this AP article

JC Penney is shifting from a Hi-Lo strategy with high mark-ups and frequent sales to an Every Day Low Pricing (EDLP) strategy.  Applause, applause.  I think this is brilliant!  Here’s why.

1.  What they were doing wasn’t working.  “Heavy discounting has hurt department stores like Penney. The group generates an average of about $200 per square foot, less than half the $550 or $600 stores like Victoria’s Secret and Lululemon make per square foot.”  “For the 11 months through December, Penney’s revenue at stores opened at least a year — an indicator of a retailer’s health — rose 0.7 percent, while competitors like Macy’s Inc. rose 5.4 percent, and Kohl’s was up 1.1 percent.”  Time to try something different.

2.  The JC Penney brand is not low price (especially compared to stores like Walmart and Target), but their old strategy targeted the most price sensitive customers. “Last year, the company, which offered 590 sales events last year, nearly three-quarters of its revenue come from merchandise that was discounted by 50 percent or more.”  When a brick and mortar retailer goes after the price sensitive market, they are competing heavily with Internet retailers.  JC Penney needs to find market segments that are not focused only on price and then serve them well. 

3.  JC Penney is not only switching to EDLP, they are ADDING VALUE.  “Penney executives outlined plans to in the next two years add Main Street, a series of 80 to 100 brand shops in stores similar to the Martha Stewart ones. It also plans to open areas in all stores called Town Square, a place that will offer services and expert advice, similar to Apple’s Genius bars.”  Shoppers are choosing between JC Penney, other brick and mortar stores and internet retailers.  This could be the reason some shoppers will go to JC Penney.

4.  Consumers may not know how badly they were getting gouged if they purchased at full price, but they knew they were being taken.  “At Penney, the regular price on an item that costs $10 to make rose 43 percent, from $28 in 2002 to $40 in 2011. But because of all of its sales and other promotions, what it actually ended up selling for rose only 15 cents, from $15.80 to $15.95 during that same period.”  Let me interpret.  Cost is $10.  Full price is $40.  Average price paid is $16.  Customers inherently knew that $40 was too much because the store would lower the price soon.  EDLP enables JC Penney to have a more honest relationship with their customers.  Honest relationships are more likely to be long-term relationships.

It is possible that this is too little, too late.  It is possible that Internet retailers have too much of an advantage going forward.  It is possible JC Penney will fail.  But JC Penney’s old strategy of being a me too retailer with nothing unique to offer will not win.  This new approach gives JC Penney an opportunity to be different, an opportunity to attract a set of loyal customers that want a relationship, an opportunity to succeed in the fast changing world of retail.

Your lesson:  How are you different?  Just because you’ve always done it one way doesn’t mean it will work tomorrow.  Make sure you understand how you offer value that is different from your competitors, especially your new on-line competitors.

 

Mark Stiving, Ph.D. – Pricing expert, speaker, author

Photo by rutlo