J.C. Penney, coupons and human nature

I’ve never shopped much at J.C. Penney. They seem to have a store in most mid-tier malls, but there’s not anything distinctive about them — a reason to shop there when you can buy anything under the sun online. So I was intrigued to learn a few months ago that retailing guru Ron Johnson (of the Apple stores) was taking over the CEO job. How would he differentiate a mid-market retailer?

His big idea: wean J.C. Penney and its shoppers off discounting. J.C. Penney has long relied on an aggressive discounting strategy. Until recently, less than 1 percent of Penney’s products were sold at full-price. Yep, you read that right. A full 99 percent of Penney’s products were sold at a discount. In other words, the ticketed price wasn’t a real price. A pair of gloves marked at $39.99 wasn’t intended to be sold at that price. The real price was perhaps $25 or $30, and through a combination of regular sales and coupons (available at the store or in circulars), the vast majority of buyers got somewhere near the real price.

Why would a store do this? Penney’s had clearly studied human nature. Unlike Wal-mart, which sells groceries, personal products, diapers, and other things you really need, most people don’t need the vast majority of things sold at Penney’s. The mid-market shopper likes the vision of herself as being smart with her money. How do you reconcile buying stuff you don’t need with being smart with your money? You need to believe you’re getting a steal. You’re pulling one over on the store! A deep discount also creates an implicit scarcity (sales seldom last forever), which can move people to pull the trigger on stuff they’d be neutral about otherwise.

Of course, given that the “steal” is really the price the store intended the item to be sold at in the first place, you could argue that the Penney’s strategy was based on believing its customers are morons. That’s not the kind of belief that makes coming to work fun in the morning. And so Johnson set about trying to change the pricing. A $30 pair of gloves is marked at $30. There may be a few seasonal sales to get rid of products before new ones come in, but the chronic over-marking and then discounting is gone.

The result? Human nature, it appears, does not change quickly. According to an article in the most recent BusinessWeek, Penney’s sales are way down: the chain lost $163 million in the first three months of 2012. Sales at stores open more than a year fell 19 percent. It doesn’t matter if the effective prices are exactly the same as they were before. People want to believe they’re winning a game, with the occasional slot machine style jackpot of stacking coupons and store sales and getting those “$39.99” gloves for $10. The fact that you didn’t need gloves in the first place, and you’re also walking out with three pairs of jeans at discounted (but still profitable) prices doesn’t factor into the world view of being smart with your money.

We’ll see if Penney’s board allows Johnson to hold tight to his strategy. Over time, particularly if the store manages to pull in some enterprise brands, he could transform the customer relationship. But whenever you’re tempted to get excited about coupons, remember 1) that they’re issued by manufacturers and stores, who tend not to be in the business of losing money on purpose and 2) Penney’s 99 percent discounting rate. Personally, I’m trying to stay out of stores in general, and only buying an item on sale if I would buy it at full price. If not, then I probably don’t want or need it — and the store is winning one way or another.

10 thoughts on “J.C. Penney, coupons and human nature

  1. It sounds like JC Penney used to segment their shoppers but is doing less of that. I’ll bet the distribution of prices that a given item sells for has narrowed. When stores do this, they sell less because shoppers like me, who pay attention to prices and snap when items hit their seasonal low, shop elsewhere. I have 3 growing boys within 6 lb of each other, so staying out of stores doesn’t feel like an option for me! We don’t have many children’s options (no JC Penney, for example) but Kohl’s sale prices are cheaper than Target’s. Target’s prices are much more consistent.

  2. It’s like a war we wage as consumers to protect ourselves from the psychological tricks that the million (billion?) dollar marketing machine has created to get more of our money!

    I think economists/psychiatrists refer to this Penney’s thing as “framing”. The higher price the customer sees initially on the tag “frames” their perspective. While they might never actually want to pay that price, it frames a number into their brains. So then the discounted price seems like a huge steal.

    Yeah… bad move as the new guy retailer trying to fight human nature.

    1. @Carrie- oh, yes, there’s a whole host of tricks. Anchoring is one. Another is having three items — high priced, middle priced, low priced. Most people choose the middle because we don’t want to seem profligate or cheap. But that means you put the highest margin item in the middle.

  3. It’s “anchoring” which can be considered a form of framing.

    One of my high school jobs was doing surveys for a public opinion laboratory, and one of the surveys we did was for a lawsuit against a jewelry store that never sold anything at full price.

  4. Please don’t think less of me but I do shop at the lost and found at the pool, since the public pool announced that after last season there was a room full of stuff left at the pool which had to get donated or thrown away… this year the pool announced it will all go after 2 weeks… so I just do a drive by and have picked up a few lovely towels and a talbots skirt already… i just can’t believe how wasteful most upper middle class americans and their kids are … how can your kid or you for that matter leave a $10 towel behind at the pool on the first weekend of summer… my husband and my mother in law love jc penney though and they do love getting things on sale… what I really are about is how little of their dollars go ot marketing to Hispanics even though given their selection of kids clothes and other things Hispanic families are 2x as likely to shop there as … well pretty much everyone else to whom marketing dollars currently go!
    if you do not think business is racist or partialized to white men come work in my world of multicultural marketing.. never had so much fun shaking it up!

  5. The stats about 99% of items are bought on sale reminds me of gambling. I believe statistically most people lose money gambling, yet 99% of my friends / family claim that they won money, or broke even at least. People really like to think they outsmart the system. Of course yesterday I bought some stuff “on sale” at Target.

  6. I haven’t been a JC Penney shopper very often…but I have been considering it again, as all their prices are lower, and I do admire the makeover to their advertising. Obviously, they are trying to appeal to a different market segment as well — definitely upping the “cool” factor. I hate playing the discount/rewards game most of the time, so I am glad to see that they are being honest about the prices. Recently, a small decorator’s boutique in our little town did a similar makeover — lower prices, no rewards. It will be interesting to see how it all works out…

  7. In the past, I’ve shopped at J.C. Penney frequently–they seem to carry a lot of reasonably priced items that I do need, including workout clothes, underwear, handbags and casual clothes in brands that fit my body. I admit that I enjoyed combining their coupons and sale prices (I do love a bargain) but I wasn’t driven to shop when I didn’t need anything because of the coupons. I haven’t been to JCP lately, because I haven’t needed anything and I try to stay away from recreational shopping. I hope they hang in there–if it’s real, more honest pricing would be a good thing.

    1. @Kathy- I like honest pricing too. I think it’s more respectful of customers than having a fake price and then claiming you’re getting a deal. I know it’s also hard to pull off.

  8. Good post. I read this great article on Sunday CBS News called “How Do You Know The Price IS Right? and it talked to all the psychological pricing out there. For example, a restaurant in NY has a Hamburger on the menu for $150. They know exactly what will happen by placing that on the menu. Someone will dine and say “Who is that stupid to buy a $150 dollar burger.” “Oh, look here, a $50 dollar steak, that sounds good.”

    Also, when we see 75% off, we just go crazy, but the price could really be overpriced even after the so called “75% off” Pretty interesting stuff, because I guess we really are predicable when it comes to price. Good for JCPenney’s for trying to use an honest strategy.

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