JC Penney's Lost Bargain: How Misunderstanding Value Led to a Pricing Downfall
By overlooking the "thrill of the hunt" that their core customers valued, JC Penney's everyday low pricing strategy ultimately backfired.
Pricing Disaster at JC Penney
In 2019, JC Penney, a prominent American department store chain, attempted a bold pricing strategy shift. They did away with constant sales and coupons, opting instead for everyday low prices. The goal was to simplify their pricing model and offer consistently fair value to customers.
JC Penney abandoned this strategy after Ron Johnson assumed the leadership of the company, modeling the company's stores after those of Apple. The company eliminated coupon discounts, changed the floor merchandise; and added boutiques/streets.
This change backfired dramatically. JC Penney's core customer base was accustomed to the thrill of the hunt for discounts and felt alienated by the new pricing model. Additionally, the lack of flashy sales events made the stores seem less exciting and dynamic.
The consequences were severe. Sales plummeted, profits tanked, and the company's stock price suffered a significant blow. JC Penney was forced to reverse course and bring back their sales and coupons, but the damage to their reputation and customer loyalty had already been done.
Far too many things have changed to blame JC Penney’s recent woes on a single old strategy. Amazon and other online retailers have continued to chip sales away from traditional retailers. Ron Johnson is long gone, and the new leaders brought back the old-fashioned pricing strategy and some of the old merchandise.
But, this gives a glimpse of how a misunderstanding of the perceived value of customers by a company could create a mess and push the company into trouble. This is perfectly summarized by a framework called the Value-based Pricing Strategy.
Value-based Pricing Strategy
Value-based pricing is a pricing strategy businesses use across various industries to align their prices with what customers are willing to pay for the perceived value of their products or services. Instead of solely focusing on production costs or competitor prices, companies prioritize understanding customer perceptions and their willingness to pay for the value they receive.
Before value-based pricing gained prominence, businesses typically employed two main pricing strategies:
Cost-plus pricing: This widely used method involves determining the total cost of producing a product or service and adding a markup to achieve the desired profit margin. It's a straightforward approach, but it may not always reflect the actual value customers place on the offering.
Competitor-based pricing: This strategy centers on setting prices in relation to what competitors charge for similar products or services. Companies may choose to price higher to position themselves as a premium brand or price lower to undercut competitors. However, this approach doesn't always consider the unique value proposition a company offers.
Value-Based Pricing In Practice
The "value stick" is a visual tool that illustrates the key components of value-based pricing:
Willingness to pay (WTP): The maximum amount a customer is ready to pay for a product or service based on their perceived value.
Price: The actual price the business sets for the product or service.
Cost: The expenses incurred in producing the product or delivering the service.
Willingness to sell (WTS): The minimum price at which a supplier (i.e., laborers, raw material suppliers, etc.) is prepared to sell their goods or services.
The value stick is a visual representation of how the total value created by a product or service is distributed among the customer, the company, and its suppliers. Understanding where each of these points lies on the value stick enables businesses to set strategic prices that maximize profits while also delivering value that satisfies customers and maintains good relationships with suppliers.
The difference between the lowest price suppliers are willing to accept and the price they actually charge the company is known as supplier surplus. This surplus represents the value captured by suppliers at the expense of the company.
Value-based pricing stands out from other pricing strategies because it goes beyond simply considering the costs of production and delivery. It takes into account customer sentiments and expectations, acknowledging that the market, the perceived benefits of the product, and competitor prices all influence what customers are willing to pay.Moreover, this strategy can enhance a product's reputation, as a higher price often conveys higher quality and value. This can also create opportunities for upselling, as customers are more likely to consider additional products or services when they perceive the initial offering as valuable.
“Value for customers is the difference between their appreciation of a product or a service and what they have to pay for it,” says Harvard Business School Professor Felix Oberholzer-Gee
JC Penney's Value Stick Mishap
In hindsight, CEO Ron Johnson made several missteps during his time at JC Penney, some of which can be understood using the value stick model.
Ignoring the intangible component of value: Shopping at JC Penney was an experience for many customers, with the thrill of finding a good deal being a significant part of the attraction. The new pricing strategy stripped away this emotional aspect, leaving customers less satisfied and motivated to make purchases. Additionally, by shifting to a new pricing mechanism, JC Penney failed to differentiate itself from other department stores like Macy’s, Kohl’s, Wal-Mart, and Target.
Sacrificing margin in an uneven price discovery process: JC Penney's loyal customers were price-savvy and enjoyed the challenge of hunting for bargains. However, each customer's price discovery experience could vary, and they might end up purchasing items that JC Penney didn't heavily discount, despite being drawn to the store by the promise of substantial discounts. With its new pricing mechanism, JC Penney could not rely on price tags to conceal this fact, directly eating into its margins.
Misaligned value stick: Under the value stick model, JC Penney's new pricing strategy aims to increase customer delight value by lowering prices in hopes of attracting more customers to the stores. However, this move has actually brought the "willingness to pay" point closer to the "price," thereby further reducing JC Penney's potential profit margin.
JC Penney's pricing disaster highlights the importance of understanding the multifaceted nature of value in value-based pricing. It's not just about offering fair prices, but also about considering how different pricing strategies could affect the value stick and, more importantly, affect how a company generates a healthy margin.