The Pricing Paradox: To Promote or Not to Promote, That Is the Question

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Are running sales and couponing going the way of the dinosaur?
  J.C. Penney and a number of other retailers think so.  I am not so sure, at least for the near future.  Here is why:

In January I wrote a piece entitled “J.C. Penney moves away from “Fake Pricing.”  That article gave insights into J.C. Penney’s plans to end promotions and to go to Everyday Low Pricing.  Ron Johnson, the J.C. Penney CEO, was blunt in stating that “Though retailers use promotional pricing to attract shoppers… the method used … “fake prices” — artificially inflated prices that are on near-constant markdowns.”

At the time I wondered why J.C. Penney was being so honest.  New York Times reporter, Stephanie Clifford, has some interesting insights on that very subject in a follow up article entitled Knowing Cost, the Customer Sets the Price.”  It seems that those “fake prices” Johnson spoke about actually worked well until consumers got iPhones and various apps that allowed them to check competitive prices.  Checking prices means that shoppers are either walking away or haggling for better prices.

And it’s not just J.C. Penney that’s lowering prices. “…Mango, the fashion retailer, has cut all prices by one-fifth. Stein Mart, the specialty chain, has reduced its coupons. Supervalu, the grocery chain, has

sworn off heavy promotions and lowered some prices. Even Wal-Mart has pledged to match competitors’ prices if it sets its own too high.”  All of this in reaction to shoppers who can now check prices via the Internet and see who is inflating prices.

How is it going so far?  Well, it’s not going so good.  Sales for J.C. Penney in the first three weeks of the new pricing paradigm have trended down.  They shouldn’t be surprised; when you look at history, consumers have never responded well to honest pricing.  Take away the sale, even if the price is inflated, and people go elsewhere.  One reason may be that discount hunting is a sport; that according to Mark Ellwood who calls coupon hunters “mathletes with credit cards.” Maybe there is some “Haggle” gene in people that makes them want to feel that they are smarter than other shoppers?

So what are retailers supposed to do?  If they keep inflated prices they turn off the tech savvy shoppers?  If they do away with sales and promotions they alienate the sale shoppers?

Here is what I think.  The Millennial shoppers are the most tech savvy consumers.  They don’t, however, have the numbers yet to dictate the shopping experience.  Until they age and eventually dominate the shopping experience, we will see a bifurcated consumer population.  In the meantime, I don’t envy retailers who have to figure out a middle ground for pricing.

Do you have insights on this issue; if you do please share them with us?





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2 thoughts

  1. It is difficult to say what the upcoming generation is going to feel about “sales”. I think the elation of buying something at a discount doesn’t fade at any age. It’s like finding a $5 bill on the ground … any generation is going to stop and pick it up.
    As well, sales and promotions encourage people to buy thing when they otherwise wouldn’t … I can name a few family members who are guilty of this. Without promotions, there’s no added encouragement to spend your hard earned money.
    In the end, why not have “Every Day Low Prices” with occasional and short-term sales to encourage traffic and increase volume (even at the short term peril of lower margins). Hmm, there’s a novel thought.

  2. Richard,
    What most retailers fail to realize is that pricing is mostly just a value equation.
    Does the price of the product match the worth of the item to me? That is the question every shopper asks about every item they buy.
    What is this worth to me?
    We then put a perceived price on that item. If the actual price equals the perceived price, we buy. If it is much higher, we do not buy. If it is much lower, we ask another question – why? Is there something wrong with the item? Is it too cheap of an item or am I just getting a good deal?
    This is why sales work so well. The actual price is often below the perceived price, so you ask “why?” Since it is on “sale” you think you are getting a good deal rather than it is just a cheap item (which is usually the case).
    The downside to the pricing game is that first, you only lure customers to whom price is the primary factor (which is about half the buyers in any product) and second, you lose the trust factor (the most important factor to the other half of the buyers).
    Since most retailers play the price game, there are a whole bunch of customers looking for someone to trust and not finding anyone. JC Penney got rid of the price customer in search of the trust customer, but no one trusts them (yet?).

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