Changing Prices is Never Easy – Just Ask JC Penney

JC Penney Logo

In an AP Interview on January 30th 2012, Ron Johnson, the new CEO of JC Penney said that “pricing is actually a pretty simple and straight forward thing.  Customers will not pay literally a penny more than the true value of the product.”  After seeing JC Penney’s Q1 2012 same store revenues drop 18.9% YOY with a quarterly loss of $163M, we’re guessing that Ron and his fellow investors and stakeholders don’t think pricing is that easy anymore.

JC Penney certainly set out to tackle a huge problem. But in many cases, the pushback wasn’t merely about value – but about customer perceptions. They have trained their customers to buy things on sale. One customer explained that they still needed the “high” they get from shopping with coupons. Despite an expensive ad campaign, change has turned out to be slow.

So what lessons should we take away from this?

  1. Get pricing right at product launch.  It’s hard to go back and change perceptions and raise prices.  This requires up-front effort during the product development cycle when everyone has a lot of balls in the air.  Many companies put off pricing until the week of launch when there’s no time to do proper research.  Companies need to start early.
  2. Increase prices very carefully.  Many companies we talk with have underpriced products compared to the value delivered to customers or compared to the competition.  It’s critical to communicate that value!  Many times it takes surgical precision to increase prices where value is apparent, and not touch prices where the value is less obvious.  It’s also critical to track what your competitors will do as a result of your price increase.
  3. Overall positioning change or re-branding can help justify price increases, but it takes time and can be risky.  It takes a strong stomach and tough share-holders to stay the course.  In this case, JC Penney executives are now back-tracking and going back to some of their old discounting habits.  Much of this is a reaction to a drop in sales and a corresponding drop in share price.

We will continue to keep an eye on JC Penney and bring you updates.

References

http://seekingalpha.com/article/608461-j-c-penney-valuing-a-company-undergoing-an-extraordinary-transformation
http://articles.businessinsider.com/2012-01-26/strategy/30665788_1_reasonable-prices-promotions-apple
http://www.businessinsider.com/why-this-jcpenney-customer-wants-her-coupons-back-2012-5
http://seattletimes.nwsource.com/html/businesstechnology/2017375916_apusnewpenneyceotalks.html
http://knowledge.wharton.upenn.edu/article.cfm?articleid=2813

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