J.C. Penney and The Slippery Slope of Discounting
Once you step out onto the slippery slope of discounting to drive sales, there’s no going back. As J.C. Penney and its new CEO Ron Johnson is learning.
If you’re an independent retailer and tempted to resort to discounting to drive sales, for whatever reason, stop for a second and consider the mess that J.C. Penney finds itself in.
After years of driving sales through an endless series of sales, couponing and other forms of price promotion, Ron Johnson, widely credited with developing the concept of the Apple Retail Stores while the Sr. VP of Retail Operations for Apple, was brought in by J.C. Penney to work his magic on that company. His first prescription was to abandon the company’s promotion pricing strategy in favor of an everyday low price (EDLP) strategy.
There was only one problem; J.C. Penney’s remaining customer base was well trained. For years, they’d been encouraged to see retail pricing as a zero sum gain. If the company put something on sale for 30% off, that meant they must be beating the company out of 30%. If the sale was for 50% off, they were beating the company out of 50%. It became a game, to get the best bargain, and it was how customers grew to determine value. It didn’t matter what the item was, how well it was made, how skilled the service or pleasant the stores, it all came down to price, and how deep the discount was.
Ron Johnson set out to reverse all that. He was convinced that customers would pay the same retails, but without the discounting, through everyday low pricing. Ultimately, that would allow the company to shift the value proposition away from just price, and allow them to get better paid for the better merchandise they wanted to add to their offering.
Their customers aren’t having it. Last week, the company announced that same store sales fell 19% in the first quarter, resulting in an overall loss of $163M. Traffic fell by 10%, and conversion fell by 5%. And Ron Johnson’s take on all of this: "Coupons were a drug, they really drove traffic."
Mr. Johnson couldn’t be disrespecting his customers more. It was the company, not the customers that was addicted. Penney’s customers are not interested in just low prices, the want the satisfaction of getting a bargain. To them, Penney’s discount pricing strategy was hardly a drug. Rather, it represented the ground rules to their relationship – the greater the discount, the more I’ve taken you for, so I’m going to hold out for more and more.
Mr. Johnson’s solution is more marketing; “We've got to get people to understand our pricing strategy.” I would submit that Penney’s customers understand Ron Johnson’s pricing strategy all too well, and they are not buying.
Independent retailers have to sort through a lot of noise. With all of the sale messages constantly swirling around them it’s easy to think that that’s the only way they can grow their business.
Once you step out onto the slippery slope of discounting, however, there’s no going back. Your customer’s won’t let you. The never-ending cycle of deeper discounting and narrower margins is a road to oblivion. It turns everything into a commodity, with price the sole driver. It’s simply not a sustainable business model.
As Ron Johnson well understands.