J.C. Penney Pricing Strategy: What is in Store? (Exclusive)

J.C. Penney Co is introducing a three-tier price model by which the retailer is essentially committing to a new markdown pricing strategy that will convince consumers that some items will not have price reductions (everyday fair price), thereby their risk of buying at current prices is low, according to a Stanford University business faculty.

In an exclusive interview to International Business Times, Harikesh Nair, who is Associate Professor of Marketing in Stanford Graduate School of Business and Spence Faculty Scholar for 2011-2012, says that JC Penney's latest strategy is about moving into a new equilibrium in which consumer's incentive to delay purchase is reduced.

He notes that consumers are now more value and price conscious. So pricing strategy needs to be better aligned with consumer value and heterogeneity in consumer value. Incorporating quantitative measures of consumer value into pricing is critical, he feels.

Here are some excerpts from the interview:

What is the new fair and square pricing strategy rolled out by J.C Penney about?

To understand the new pricing strategy, one needs to delve into the context in which the price change is being implemented. Many retailers are now stuck in a situation in which many consumers are so used to waiting for a sale that they rarely buy anything not on sale.

Sales, which originally started as a policy to unload excess inventory and to increase short-run demand, ultimately had the long-run impact of changing the price perceptions of consumers, convincing many that the option value of waiting for the item to go to clearance was high. Hence, many wait.

The problem is compounded by the fact that unlike perishables, clothes are durable goods in the economics sense, so even when on clearance, their intrinsic quality does not deteriorated much. Many sales thus lose money because consumers substitute a high-price present purchase for a low-price future. The net effect is a reduction of long-run profitability from promotions for retailers.

Can this strategy be effective? What are the features a retail firm should have to make it a successful strategy?

By committing to cut prices only on pre-specified days of the month, J.C. Penney is also reducing the uncertainty associated with consumer price expectations. The likely hope is that the reduction in the uncertainty in the price expectations of consumers increases purchases.

Many studies show that this may indeed be the case. With uncertainty, a consumer arriving at a store at the beginning of the month may think: I can't buy now because it may go on sale tomorrow, but if they believe the retailer's commitment to cut prices only on a particular day of the month, the consumer may think: It is not going to go on sale for sure till that day, so I need to wait for a while for sure. Perhaps, I should buy now. If perceptions are formed in this way, all things equal, net demand may go up.

The extent to which it can be effective depends on how successful the firm is in changing consumer's price perceptions. If consumers are convinced that the firm will stick to its promise of everyday fair prices, then it will likely work in the manner outlined above.

Is this strategy previously implemented successfully or unsuccessfully by other companies?

It is similar to Every Day Low Prices (EDLP), but with some differences, so it is hard to compare. J.C. Penney's pricing combines everyday low prices on most items with a pre-specified markdown pricing policy on others. The markdown part is not a feature of Wal-Mart's EDLP.