[NOTE: This post was updated October 2016]
A recent article in the Harvard Business Review talks about how J.C. Penney’s switch to the Fair and Square Everyday Low Pricing Strategy failed. The idea was to get rid of discounts and there won’t be any need to promote sales because, well, every day is a sale with low pricing. Sounds reasonable. The campaign was spearheaded by new CEO, Ron Johnson, who was formerly head of Apple’s retail store division.
The Fair and Square Everyday Low Pricing Strategy even features Ellen DeGeneres in funny TV commercials. One commercial had Ellen complaining about the cost of a hat. Another one showed her having a hard time trying to return a toga. And in another TV ad, Ellen is wondering why she has to wake up so early to get to a sale. I like Ellen and the TV commercials are funny. But I had a bad feeling that consumers would not connect with the ads, and it seems I was right.
According to the Harvard Business Review article (2012), J.C. Penney’s same store sales dropped by 18.9%, store visits decreased by 10%, and the average spend was down by 5% for the first quarter under this new pricing strategy. J.C. Penney lost $163 million (compared to earning $64 million in the first quarter of 2011) and its stock was $43 per share after the new pricing strategy was first announced in January 2012, now trades below $30.
In the HBR article, Mohammed (2012) said that during an investor conference call in mid-May, CEO Johnson maintained that the problem is that customers just don’t know about J.C. Penney’s new pricing strategy. Not only is this an understatement, it also underscores an important misunderstanding. Even if customers do understand, I don’t believe they would buy into that strategy. In other words, just because I understand what a company is attempting to do to market its product, it does not mean that I will go out and spend money for it.
Mohammed added, “Shifting from offering 590 promotions annually to a trimmed down Everyday Low Price Strategy, as J.C. Penney did, is a big change to communicate to shoppers.”
Philip Graves, in his book “Consumerology,” talks about the significance of considering the consumer in context. He writes:
“If you want to know why someone does or doesn’t buy, you have to understand how the environment shapes behavior. Divorcing the quest for understanding from the context in which it takes place is a recipe for leading yourself astray. To maximize sales or the impact of communication, the environment has to be right” (Graves, 2010, p. 53).
Thus, without taking into account the context, corporate advertising decisions can lead to products that are not well-received by consumers or marketing decisions that are off the mark. In the case of J.C. Penney, the product is J.C. Penney itself or its stores, since Penney is a retailer that sells merchandise and services to consumers through its department stores and online.
Here’s an example,
“When McDonald’s developed the Arch Deluxe burger in the mid-1990s, the company was confident that it had a winning product that would appeal to adult consumers. In the context of its market research the product performed very well, but in the context of a McDonald’s restaurant, complete with “Happy Meals,” Ronald McDonald, and other child-associated cues, the reaction was very different. Ironically, the advertising concept, which featured Ronald McDonald taking part in more grown-up activities, probably reinforced the contradictory associations customers were battling with” (Graves, 2010, p. 59).
So why didn’t market research work, and why didn’t it translate into real-world success?
“McDonald’s developed its “Burger with the Grown-up Taste” from its Oak Brook headquarters in a direct move to appeal more to adults. Away from the plastic seating, bright primary colors, and menus of familiar, child-friendly alternatives, respondents rated the product highly for taste, freshness, and satisfaction. Despite more than $200 million of expenditure, at least $100 million of which was spent promoting this product that research had shown was so appealing, it failed and was withdrawn” (Graves, 2010, pp. 59-60).
J.C. Penney’s Fair and Square Everyday Low Pricing Strategy failed because it did not consider context. Doing a sudden U-turn from offering 590 promotions annually to an Everyday Low Price Strategy is drastic. As a consumer, when I think about department stores and shopping for clothing or other items, I want a “good deal” and I look for “deals.” My brain has become accustomed to seeking out deals, sales, and bargains. There’s also something about finding a deal or catching a good “sale.” J.C. Penney executives are learning this too late, as the new CEO admitted, “We did not realize how deep some of the customers were into [coupons]” (Bhasin, 2012).
The lesson is this: Human behavior is strongly influenced by the environment. It is crucial to consider the context that people are in. “The context can determine not just how the person behaves, but how differently they act from the way they might have expected to, and, in most cases, how they would like to tell themselves they would” (p. 60).
Written By: Steve Nguyen, Ph.D.
Leadership + Talent Development Advisor
Bhasin, K. (May, 2012). JCPenney Execs Admit They Didn’t Realize How Much Customers Were Into Coupons. Retrieved from http://www.businessinsider.com/jcpenney-didnt-realize-how-much-customers-were-into-coupons-2012-5
Forbes. JC Penney. http://www.forbes.com/companies/jc-penney/
Graves, P. (2010). Consumer.ology: The market research myth, the truth about consumers and the psychology of shopping. Boston, MA: Nicholas Brealey Publishing.
Mohammed, R. (May, 2012). J.C. Penney: Ditch the Risky Pricing Strategy. Harvard Business Review. Retrieved from http://blogs.hbr.org/cs/2012/05/jc_penney_ditch_the_risky_pric.html
The Huffington Post – Ellen DeGeneres’ JCPenney Ads Debut During The Oscars