J.C. Penney’s infamous pricing strategy fail has been referenced in many college classrooms and case studies. If you’re unfamiliar with this story, here’s a quick rundown.
In 2011, J.C. Penney attempted to rework their pricing strategy by eliminating coupons/sales and adapting an “everyday low prices” model. Instead of sending out weekly promotions and running sales, the company offered their best pricing all year round. Seems like a good deal, right? Wrong.
The results were catastrophic, and J.C. Penney eventually reverted to their old pricing model.
Everyday low pricing (EDLP) isn’t a failed pricing strategy in and of itself. Most people associate this model with retail giant, Walmart, whose had success with this model. That said, it’s a very tough model to compete on.
Why did J.C. Penney fail?
Instead of breaking down the specifics of this 7-year old blunder, I want to focus on takeaways that all marketers can apply today.
Let’s get to it.
#1: Value is Subjective
How much is a t-shirt worth? How about a silver necklace? An insulated water bottle?
Whatever your answers may be, you’re both right and wrong. Within the same shopping mall, I can find t-shirts for $5 and $100. If the concept of value existed, the “$100” shirt would never sell.
Value is subjective and we have no universal “value” or “utility” metric. To put this simply, we can be convinced that a product is worth a certain price. In fact, more expensive products often sell faster than cheaper products.
There’s a great example in Robert Cialdini’s, Influence. He tells the story of a shopkeeper in Sedona who had a case of turquoise jewelry that wasn’t selling. The shopkeeper told her employee to sell the jewelry at half price, but the employee mistakenly doubled the prices. The shopkeeper was shocked to find out that the previously undesirable jewelry, now marked up by 100%, sold out in a heartbeat.
Everyone cares about cost, but there are more ways to compete. Here are just a few:
Companies like Walmart thrive using the EDLP model because most people have a decent understanding of the value of groceries. You know what a loaf of bread should cost, and you know that Walmart provides a competitive price.
Contrarily, you don’t know what most products in J.C. Penney should cost, so “every day low prices” doesn’t necessarily shout, “value!”
As marketers, we have the opportunity to define value. Marketing, in itself, adds value to a product.
Think about the sellers on Amazon. A large portion order products from Chinese suppliers on AliBaba, rebrand the products, and sell them at a significant markup.
Now, the takeaway isn’t that marketers should increase prices on all of their products. Instead, they should focus on creating a value proposition that allows for higher pricing.
Here are a few examples for competing on more than price:
Quality – “A handmade, one-of a kind sparkling ruby ring that’s both stunning and durable” vs. “Gem Ring”
Exclusivity – “Our Facebook Ads Mastermind is the one time every year when you can learn from the top Facebook marketers in the world. Space is limited to 50 people.” vs. “Learn how to run Facebook Ads”
Utility – “This coffee maker delivers the best coffee you’ll ever taste. You’ll never go back to spending $5 on coffee again. That’s over $1,800 in savings every year!” vs. “Buy this Coffee Machine.”
Value in the Services Industry
Without getting too far off track, I want to stress that creating a better value proposition is particularly important if you are a service provider. Service providers generally exchange their time for money, and since time is a finite resource, service providers should aim to make the most money for every hour worked.
A good value proposition helps service providers offer the exact same work at a higher price.
#2: Pricing Hacks Work
Whether we like to admit it or not, none of us are “rational” shoppers. Don’t believe me? Read Daniel Kahneman’s Thinking Fast and Slow and tell me you’ve never fallen victim to any of the heuristics mentioned in the book. Here’s a brief summary that does no justice to the incredibly well-researched work of Daniel Kahneman:
Humans rely on mental shortcuts to make decisions. It would be impossible for us to think critically about every situation, so we rely on (or fall victim to) heuristics that help us think and act faster. These thought processes are automatic and unavoidable.
As mentioned above, value is subjective. We have no real way of knowing what a product is really worth. All we can do is combine the information we have with the cues around us. Pricing “hacks” are one of those cues.
Sales are the most obvious example of a price “hack.” There’s not a single marketer who hasn’t used a sales-based pricing strategy.
“Normally $199… Today only, $47”
“This $100 ebook is yours free!”
Regardless of how rational we think we are, we all like to think we’re saving. Maybe you’re immune to the most obvious of sales, but these cues are everywhere. Here are a few more examples:
Candy Bars: 3 for $1 – You’re more likely to buy 3, even though most stores will sell you one for $0.33.
50% Off Powerade. Limit 5 – You’re likely to buy more of the product than you would if the limit wasn’t there.
Free Shipping on Orders Over $35 – You’re likely to spend more than you would if you just paid for shipping.
Pricing hacks can push customers to buy AND to buy MORE.
#3: Don’t Deliver Value – Create It!
While “every day low prices” truly deliver the best value to customers, they don’t convey the best value.
“Buy-one-get-one” feels way better than buying one at an every day low price that’s half of the alternative.
Getting 50% off of a $10 product feels better than buying the same product at an every day low price of $5.
Using a coupon feels more exclusive than getting the same product at the same price without the coupon.
$25 + free shipping feels better than $20 + $5 shipping.
Putting This Into Action
Customers are not “price” sensitive; they are “value” sensitive. Value is the result of the cost-benefit analysis customers automatically make before buying a product. It’s your job as a marketer to manipulate that analysis by strengthening the “benefit” half of that equation.