JCPenney's Big Gamble

Pricing is one of the main levers that retailers use to counteract slow sales.  It has been for many years.  JCPenney’s new pricing strategy is saying “pish posh” to this idea.

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A bit of background on retail promotional strategies:  If a shirt is meant to sell out within 6 weeks, but there’s still a ton of inventory left at the 4-week mark, then we have a problem….especially if the item is seasonal.  Think candy cane sweaters or Valentine’s Day t-shirts. 

At this point, a retailer can offer a promotion or markdown to entice customers to purchase.  This speeds sales and helps the item “catch up” to its original sales plan. 

JCPenney’s new strategy is risky.  Why?  Because starting with a much lower retail selling price means that the brand has less room to reduce prices in case something doesn’t sell as planned.  If people weren’t buying the t-shirt at $7, will reducing it to $6 drive enough sales volume?  That’s only $1 less and customers will know that it’s a measly discount by looking at the tag.

By contrast, if the item is originally $14.99, then a new price of $6 is a 60% discount. Imagine how exciting a 60% off sign looks in a store window or promotional sign at Gap Outlet. Sales attract customers and make them feel like they are saving money when they are spending money.

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JCPenney’s pricing strategy brings up the topic of consumer psychology and purchasing behavior. The retailer will win if customers prioritize the absolute dollar amount they are paying instead of the perceived discount they are receiving. 

I know that I respond to the thrill of a good deal.  How do you think customers will respond to JCPenney’s approach?

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UncategorizedWes Kao