Pricing strategy frameworks and implementation

Pricing

JC Penney is a major department store, doing billions of dollars in revenue per year. The industry, however, is mature and some would say stale. Younger consumers in particular are not attracted to the department store shopping experience, instead choosing anything but. JC Penney tapped former Apple executive Ron Johnson as its new CEO, and made big changes to its merchandising and especially to its pricing. One pricing strategy that Johnson instituted was to eliminate the traditional JC Penney sales and opt for lower prices across the board (D'Innocenzo, 2012). Analysts from his alma mater Harvard Business School lauded him as a genius for the simplified pricing program (Girard, 2012). Yet, Johnson couldn't wrap his head around the fact that the key purchase drivers in department store sales are nothing like the purchase drivers in consumer electronics, and the pricing strategy did not go nearly as well as planned. HBS lauded the everyday pricing strategy -- at 40% the previous suggested prices -- as a classic business school case study. It is that.

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JC Penney's pricing strategy was a disaster. The store's old customers wanted to find deals, as that was one of the big appeals of shopping there. The deals, of course, were loss leaders and people would also end up buying some full-priced items while in the stores as well. But the new pricing turned off many of the store's existing customers, who were accustomed to cobbling together their own deals (Berfield & Maheshwari, 2012). After 17 months, Johnson was fired as CEO (Passikoff, 2013). The result was year-over-year sales declines of 29%. Will that strategy work in the long run? How does a company get back a 29% one-year decline? No, this strategy is not going to work in the long run. Pricing was not really the problem at JC Penney; the stores themselves were the problem. Nothing about the department store shopping experience appeals to younger consumers. Johnson did try to fix a lot of other things, but the pricing effort was the one that really disoriented and alienated the store's existing customers, many of whom are now probably lost forever. Forget competition and the economy -- neither is relevant here -- changing consumer behavior is killing the department store, and that is the battle JC Penney must fight. All Johnson did was get rid of old customers, but he should have been smart enough to know that he couldn't attract new, young customers by changing the pricing because that isn't why they were avoiding the store in the first place.

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The pricing strategy was intended to complement the merchandising and promotion strategies. New merchandise partners were going to be attracted by the consistent pricing, and many new brands came on board with the change in pricing policy. Promotions were no longer going to be based on sales, but rather on everyday excellence at the store. So the pricing strategy was tied into everything else quite closely. In practice, this wasn't nearly as complementary as it was in theory, mostly because none of this served to actually attract new customers.

The company was trying to reposition itself away from its existing customer base -- succeeding admirably -- and building up a new customer base. The newer customers were to be attracted to the new merchandise lines (they weren't) and easier-to-understand pricing. So a lot of this was done to pursue a different type of customer, one that would grow with JC Penney, compared with the present older demographic. The effort coincided with a broader rebranding effort -- jcp. So lower case and initials, easy to text, I guess was the thinking. Basically tossing out a brand with billion-dollar value in favor of a meaningless acronym and childishly earnest styling. Again, all of these things work together fairly well on paper, bringing in younger consumers. The problem is that the stores are still boring monoliths and they are still the store where your dad buys shirts for work. More needed to be done to make the pricing strategy work, but it was the change in pricing strategy that created the crisis with the older customers. If the older pricing strategy had been maintained, the company would have had more time to make the other changes.