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

April 16, 2012

Price

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?