The price game

When Ron Johnson took over as CEO of J. C. Penney, one of his most sweeping changes was to move away from the constant sales and coupons to a more straightforward pricing model. Not surprising considering he came from Apple where they hold one sale a year, on Black Friday, and not even a great one at that.

But J. C. Penney is not Apple, and the price game each is playing is different.

Mr. Johnson explained a similar logic when he moved the chain toward simplified pricing. In January 2012, while introducing his new plan to investors, the press and vendors, Mr. Johnson said that in the previous year, the company held 590 sales events; almost three-quarters of the stuff it sold was marked down 50 percent or more.

But here’s the thing: customers weren’t actually paying less. The chain just kept raising the prices that customers saw on the racks, and then discounted those prices during promotions. Why keep playing a game that is expensive and troublesome for the seller and a mirage for the consumer?

J. C. Penney was not the first retailer to be astonished by the brilliance of this realization. In 2006, Macy’s had a similar idea after acquiring the coupon-happy May department stores. It decided to “retrain” those customers, as its chief financial officer put it at the time, by drastically cutting coupons. By 2007, it had abandoned that strategy. Its chief executive acknowledged that pulling back on coupons was Macy’s biggest mistake in its acquisition.

Even Walmart, which actually does pull off the trick of “everyday low prices” in its domestic stores, is finding it hard to convert consumers to a single-price model in countries like Brazil and China, where retailers give deep discounts on a few main products, then mark up the rest, said Mark Wiltamuth, an analyst at Morgan Stanley.

The problem, economists and marketing experts say, is that consumers are conditioned to wait for deals and sales, partly because they do not have a good sense of how much an item should be worth to them and need cues to figure that out.

Just having a generically fair or low price, as Penney did, said Alexander Chernev, a marketing professor at the Kellogg School of Management at Northwestern University, assumes that consumers have some context for how much items should cost. But they don’t.

Price strategy has to be supported throughout the organization. For Apple to have one price for its items means they must enforce that price through all of its distribution partners, and it must also create advertising that reinforces the premium quality of the goods. And of course, the products must be good enough to justify a no discount policy.

One thing is for certain: once you go sale, it's tough to go back (once you go red, it's hard to go black?). Companies that consider a sale or discount strategy should do so carefully. Once customers expect a regular cadence of sales or discounts (e.g. Restoration Hardware's bi-annual bath sales, or Bed Bath and Beyond's ubiquitous 20% off coupons) they orient their entire behavior around that pattern and won't easily be persuaded to buy at full price ever again.