J C Penney is moving to what they call “Fair and Square” pricing. It involves permanently marking down their merchandise by at least 40%, so there will no longer be the deep discount sales that their customers have come to expect. They will now offer only three prices – Every day Prices, Month Long Value Prices, and Best Prices. The intention is to keep things simple and offer customers more predictable pricing.
As JC Penney goes after the price sensitive market, they are competing with other value retailers and internet retailers who compete completely on price. JC Penney is trying to find a customer segment that is not entirely focused on price and deliver a different experience to them. But the problem is that JC Penney is currently a “me too” retailer, with nothing unique to offer. They are selling to a customer segment that is trained to look for the cheapest deal and their products don’t possess the differentiation to take consumer’s focus off its price. When selling a relatively undifferentiated product, it is hard to convince customers to pay more than what a lower priced competitor might offer. Differentiation is a key to avoiding steep discounts, and for JCP it seems pre-mature to offer lower prices when products are not differentiated.
That differentiation can come from products or from the service in their stores. The “Town Square” concept is aimed at achieving just this – create an experience that no other retailer provides. But that’s still a few years out. CEO, Ron Johnson is a former Apple executive who played a big role in the success of the Apple Stores. Applying the same principles will not work here as JCP neither has the product differentiation nor the brand loyalty of Apple’s customers.
Big box retailers have always used steep discounts to get people in the door. They use the original list price as a reference price to help create a perception that buyers are getting value. With this new pricing approach, JC Penney is not creating this psychological frame of reference in their customer’s minds.
Once Mr. Johnson completes his long-term vision of making JCP an innovative customer service retailer, they will have the differentiation in shopping experience to make this Fair and Square pricing strategy a success. But given its current commodity like product mix and very price-sensitive customer base, these price changes seem premature.
Ashwin Somakumar 