Less than 1% of J.C. Penney’s revenues come from items bought at full price. By contrast, nearly three-quarters of merchandise sold by the department store chain is discounted by at least 50% off. What this tells shoppers is that J.C. Penney’s original prices are pretty much meaningless. They’re floated out there to see if any suckers bite, and also to make the inevitable markdowns seem more impressive. Soon, though, J.C. Penney promises it’ll stop playing games, cut to the chase, and offer a more simplified, sensible pricing structure. For example, a T-shirt that used to retail for $14—but typically wound up selling for $6—will just be priced at $7 from the start.
The term “anchoring” or “price anchoring” describes the phenomenon that occurs when a shopper is more inclined to buy an item that’s half off an originally listed price of $30 than he would be if the item was originally priced at $15, or perhaps even $12. That original, likely highly inflated price serves a purpose—to “anchor” in the consumer’s perception of the item’s value. When compared to the original price, a heavily discounted price seems like a deal, and the shopper is more likely to buy, regardless of whether or not the item is actually worth the “discounted” price being charged.
Marketers use price anchoring all the time; it’s one of the many ways shoppers are manipulated into paying more than they should and buying stuff they don’t need. Automakers use the strategy regularly: Who pays full MSRP after all?
But perhaps the most common spot for anchoring is the retail department store where sales are nonstop, and where there’s never a need to pay full price for anything. Retailers resort to constant sales to pump up business, but it appears as if J.C. Penney has been going to the well too often. (Kohl’s and Macy’s seem to be guilty of this as well.) Now, after months in which J.C. Penney’s sales figures fared poorly compared to the competition, the chain has announced major changes in how merchandise will be priced.
On Wednesday, Ron Johnson, a former Apple executive and current J.C. Penney CEO said the chain would stop playing pricing games. Or at least, it’d start playing less of them.
According to the New York Times, Johnson said J.C. Penney will get rid of what he calls “fake prices.” You know, the ones that almost no one pays, existing mainly to give the retailer justification for saying that a more reasonable price is actually a dramatic markdown.
Johnson said that it’s been a long time since retailers have been able to fool consumers with “fake prices”:
From 2002 to 2011, the average cost that Penney paid for an item stayed about the same, from $9 to $10. During that period, though, Penney increased the average price tag to $36 from about $27. Yet even as the price tag rose, customers ended up paying less because of coupons or sales. “Now most things are on 60 percent markdown, and every time we do that, we’re discounting Penney’s brand,” he said.
In J.C. Penney’s new pricing strategy, those inflated original list prices will disappear. They’ll be replaced by what it calls “Every Day” prices, which will be much cheaper (40% or more less) than the old MSRPs. The switch makes it possible to pay full price at J.C. Penney and not feel like a fool.
J.C. Penney will still host sales, but there will be fewer of them than in the past. Instead of a roster of discounted items that changes week to week, select goods will go on sale for one-month periods. Finally, there will be clearance deals on the first and third Friday of each month. What’s more, J.C. Penney will simplify its price tags so that shoppers won’t get confused: A red tag for the “Every Day” price, a white one for “Monthly Value,” and a blue tag for a clearance deal, a.k.a. “Best Price.” Stores will also get rid of annoying prices ending in .99; something that they used to price at $19.99 will now just sell for a flat $20. Finally, the number of brands sold at J.C. Penney will shrink to about 100, down from its current unwieldy 400. In the future, each brand will have its own store-in-a-store section at J.C. Penney.
What may be even more amazing than J.C. Penney’s dramatic pricing changes is the blunt way Johnson spoke about his company’s policies and stores. Here’s a snippet from the Los Angeles Times:
“Our stores are tired; they haven’t been updated,” Johnson said, who likened the department store experience to “almost like we are selling clothing by the pound.”
Another bit of surprising honesty courtesy of the New York Times:
“So customers ignored us 99 percent of the time,” he said. “At some point, you, as a brand, look desperate if you have to market that much.”
The honesty and willingness to change is refreshing. But I wonder: Why would he agree to lead a retail chain he doesn’t seem to like or respect all that much? The answer, I guess, is to transform it into something he can be proud of—maybe even into a place that an Apple executive would shop.