Pragmatic Pricing

By now you surely know that JCPenney changed their pricing strategy.  In February they went from having 560 annual sales events to everyday low pricing (EDLP) with prices 40% lower than before combined with infrequent sales.

At the time, I wrote they would succeed. Oops.  In May they reported their revenue was down 20%.

Why is this new strategy not working?

Many writers suggest that shoppers are more addicted to discounts than JCPenney thought.  Surely there is some truth to that explanation.  After all, doesn’t if feel great knowing you’ve landed a phenomenal deal on something you want?  Besides, sales imply a limited time offer, which may motivate people to buy things they weren’t really in the market for.

However, I don’t think that’s the biggest explanation.  We see successful stores today that thrive with EDLP pricing strategies.  Walmart, Sam’s club,  and Costco are examples of big box stores who succeed with EDLP.  So surely it is possible for EDLP to work, but why isn’t it working for JCPenney?

Answer:  EDLP is a change to their price brand.

Every company that has a brand, has a price brand.  Think of this as the expectations the company has established through past pricing behaviors in the shopper’s mind.  This could be level of pricing (high, medium, low) or frequency of sale events, or coupon availability or how easily discounts can be found.  Look at the following list of companies.

Nieman Marcus, Macy’s, Target, Amazon.com, BMW, Kia, Ford, Apple, Dell, Sony.

For each of these companies, think to yourself, do they charge low prices, high prices or somewhere in between?  How often do they offer discounts?  What type of discounts do they use?

For each of these companies, you have an idea in your head about how they price.  Now add JCPenney to the list.  They have a middle of the road pricing strategy, but most importantly everybody who shopped there prior to February 2012 expected to buy their items on sale.

Suddenly, JCPenney is trying to change the way we as customers think about their store.  This is very hard.  Imagine BMW trying to convince us their cars are inexpensive, or Walmart charging high prices?  It doesn’t fit with their price brand.

This is the problem JCPenney is facing.  It is very hard to build a brand. It is even harder to change one.  Telling someone your brand has changed is rarely enough.  A company has to prove it over time.  How much time and money is JCPenney willing to invest to change their price brand?  I still hope JCPenney succeeds with this strategy, but it’s looking doubtful.

What should you take away from this?  Know that everything you do around pricing creates your price brand.  It is very difficult to change your price brand once it’s established.  Be sure the pricing you use today is consistent with the brand message you want to have in the long run.

Mark Stiving, Ph.D. -Pricing Expert

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There is a saying in Chicago on election day, “Vote early and often.”  Of course voting more than once is illegal.  But the saying is ideal when applied to pricing.

Price Early and Often

Price Early:  develop the right products.  While you’re in the product definition stage you must understand your customers’ willingness to pay (WTP) for your future products.  You should understand the market segments and the pricing segments that you will be serving.

At this early stage you will decide whether or not to move forward at all, and you can also determine what your product portfolio will eventually look like. Knowing your customers’ WTP is critical to optimal decision making, especially during product definitions.  Even if you don’t know their WTP, you surely must state your explicit assumptions.

Price Often: respond to and/or drive the market.  Many companies release a new product at a set price and rarely revisit the price.  This is especially true for companies with thousands of SKUs.  Don’t be one of these companies.

Change happens.  Competitors change prices. Competitors add new products. You add new products. New competitors enter the market. Customer preferences change. New technologies become available. New distribution channels develop.  The world is rapidly changing around you.  Why should your prices remain static?  They shouldn’t.

If you agree, which I hope you do, what are you doing about it?  If you don’t have a person or organization dedicated to making correct price changes, they won’t happen.  Most companies and managers, especially in high tech fields, constantly drive toward the next new product and rarely re-visit the existing products.  You need to appoint/find/hire some people who are responsible for maintaining prices.

Companies create slogans to make sure everyone involved is marching in the same direction.  Feel free to borrow this slogan and make it your own.  I guarantee if you live it, your profits will increase.

Just do it!  Price Early and Often

Mark Stiving, Ph.D. – Pricing Expert

Sign up for the monthly Pricing Perspective to get a recap of all of these blogs plus more insights on pricing.

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A price is the amount of money someone has to give up to acquire a product or service.  Duh.  Everyone knows this. But what seems to be irrational is that customers also use price to infer characteristics of the offering.

We expect customers to analyze the quantity and quality and then decide if it is worth the price.  However, many of our customers use price to help them determine the quality.  This seems wrong.

We’ve seen that pricing can be a signal of quality.  When people see higher prices, they infer higher quality.  Does this make sense?  Yes.  Shoppers have probably not thought about this logically, but they have experienced unlimited examples of where they could get more quality if they were willing to pay more.  It’s all around them, so they subconsciously learn that higher prices mean higher quality.

If they wanted to justify their behavior, they would probably think something like this when looking at a higher priced product: “The manufacturer (or the retailer) knows this one is better so they priced it higher.  Besides, many other people who know more than I do have done the analysis and think this one is worth more.  Otherwise nobody would buy it and the company would lower the price.” And most of the time they would be right.  Higher quality products have higher prices.

Customers have subconsciously learned other meanings from observed prices.  Prices that end in 99 are considered to be good deals because sale prices are usually priced with 99 endings.  Prices that end in 00 are considered higher quality.  The lowest and highest prices seen by the shopper bracket the quality levels under consideration.  The higher the high price point, the more the customer will expect to pay.

But in every case, this only applies for non-expert customers.  The shoppers who are looking for clues, don’t want to become an expert in the field.  True experts know the real value and use price for the purpose it was intended, what they have to give up to acquire the product.

As you can see, price is more than just what the customer needs to buy your product or service.  It is also telling the customer more about your offering.  Take care that your prices are telling them what you want.

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Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Photo by Onkel Wart

Great news!  Most pricers have internalized the mantra “Don’t use cost plus pricing.”  Unfortunately many don’t really understand the concept.

Here’s one common error:  A part costs $1.00 to make, and the lowest price the company is willing to sell it is $1.25 because the CEO has a minimum margin of 20%.  Is this cost plus pricing?  Many people think it is.

However, most of the time, this is not cost plus pricing.  This is only setting a floor price.  Hopefully you set your actual prices using value based pricing. You determine that your customers are willing to pay prices that are significantly higher than the $1.25 floor price.  If your customers are willing to pay $2.50 and that is what you charge, then you are using value based pricing, even though there was a price floor set.

However, if you always price as aggressively as possible, at the margin floor, then yes you are using cost plus pricing.  Certainly you should be able find some customers who will buy some products are margins higher than your minimum.

Companies set margin floors for many reasons, but the key reason is to ensure employees aren’t pricing too aggressively.  This doesn’t mean a company shouldn’t break a price floor.  For example, it may be good business to sell one product at a loss if it helps sell many more of another product.  (Think razors and blades, or milk at a grocery). However, breaking the margin floor should create exception reports for executives to verify that the reason is truly strategic.

The lesson today is: Don’t be afraid of using margin to set a price floor, but don’t set your prices there, or go below it, unless you have a strategic reason.  Set your actual prices for value.

Mark Stiving, Ph.D. – Pricing Expert, Speaker, Author

Photo by Tauassi