The Battle Over Price Increases

 You see it happen almost hourly at the gas pump – prices fluctuate in response to shifts in the global market supply and demand of crude oil. If gasoline can adjust on a turn, why can’t small business pricing do the same? The answer is simple, small business markets don’t have the global scale nor the fluidity in market share to respond so dramatically. The other big reason – small business is local.

 You see it happen almost hourly at the gas pump – prices fluctuate in response to shifts in the global market supply and demand of crude oil. If gasoline can adjust on a turn, why can’t small business pricing do the same? The answer is simple, small business markets don’t have the global scale nor the fluidity in market share to respond so dramatically. The other big reason – small business is local. Consumers have a hard time understanding how global market pricing deeply impacts prices at their favorite corner pizzeria.

 

Learn by Example

JC Penny's Pricing Shift Causes Rift with ConsumersThere are pricing strategies that work and those that fall horribly flat with the consumers. JC Penny (JCP), led by Apple’s previous CFO Ron Johnson the 110-year old retail giant tried to change its stripes by using sales strategies from Apple’s iStores and Target’s boutiques within a store concepts but didn’t foresee customer confusion and push back on what they loved about the JC Penny brand – coupons, deep discounts and the feeling that they were always getting a bargain.

 

JC Penny lost its differentiation strategy when they signed on to offer ‘Fair and Square Every Day’ pricing.  The first problem is that ‘Fair and Square’ pricing isn’t the lowest competitor pricing, it’s ‘good pricing’ every day.  When competitors dropped pricing or offered incentive pricing structures, JC Penny had no way to respond or compete and ultimately, lost customers in droves.

 

Reference Pricing

That Manufacturer Suggested Retail Pricing (MSRP) you’ve seen stuck to the side of new car windows is a great psychological tool used in helping consumers justify pricing and comparison shop.  When JC Penny decided to eliminate MSRP and replace price tags with ‘Every Day’ pricing, the consumer was confused about the ‘true’ or established value.  Furthermore, abandoning  conventional pricing, i.e. prices that end in $.99, and implementing a “premium offering” pricing that ends in $.00 further confuses consumers. According to Rafi Mohammed at the Harvard Business Review, “J.C. Penny’s Every Day pricing strategy goes against the conventional wisdom of effective pricing.”

 

 

We can see now, nearly two years into JC Penny’s efforts that the strategy was a bad one. After six months into the new pricing strategy and a nearly 20 percent stock plummet, the store reversed some of its new pricing structures and reverted back to monthly ‘clearance’ pricing.  The company reported “a loss of $163 million, or 75 cent a share in the three months ending on April 28, 2012, compared with a profit of $64 million, or 28 cents per share a year earlier.”  Then in July 2012, Standard and Poor’s Rating Services lowered the retailer’s credit rating to junk status, a claim that was caveated with the projection that ‘changes have yet to take hold.’

 

A recap of lessons learned:

 

1.      Don’t make drastic changes to pricing and products without consulting your customers and employees first.  Customers are the lifeblood of any retail organization. They can be loyal and will help uphold your brand – if you respect them and their opinions.  JC Penny did not involve its customers in the brand and pricing strategy changes and their customers were not only hurt but deeply confused by the changes.

 

2.      Anticipate the worst.  JC Penny forgot a key strategy when planning their new retail rollout – a Plan B.  By the time the quarterly earnings reports were out, JC Penny was already so far behind its projections and consumer confidence that they had no real way to dig out.  There was no Plan B, just a stoic ‘moving forward’ approach that left its employees, board of directors and customers all wondering if the store would survive the changes.  Two years later, nearly 1,200 jobs lost and the CEO Ron Johnson replaced with former CEO Mike Ullman, and the stock value has plummeted. The cost for not having a Plan B is high.

 

3.      Customers don’t like change – so if you do change, do it gradually.  What former CEO Ron Johnson didn’t realize is that unlike Target and Apple, which already had well-established trendy brands and pricing structures, introducing that concept to a 110-year-old brand that built its reputation on coupons, sales and clearance racks galore. Changing every facet of the organization from how you purchase (find a clerk somewhere in the store holding an RFID hand-held device vs. at the traditional check-out counter) to what you pay, and the selection of brands, customers didn’t feel that they knew or understood what the new JC Penny represented.  

 

4.      Pricing is a reflection of consumer value-propositions and economics.  JC Penny removed the value-proposition by flattening its pricing structure to a ‘non-negotiable’ Every Day Pricing that consumers just didn’t respond to. Competitors then quickly too advantage of JC Penny’s fleeing consumers and offered them exactly what they used to find at JC Penny – coupons, discounts and sales.  Macy’s department stores saw a 38 percent increase in revenue in the first quarter of 2012 alone. Macy’s head, Terry Lundgren was so confident in how poorly JC Penny was doing that in an interview with Women’s Wear Daily he stated that “market share was going to continue to increase [for Macy’s] as a result.”

 

 

 

Pricing can be a highly sensitive and potentially volatile area for businesses large and small.  If you’re struggling with pricing structures or even want a second set of eyes to review the pricing strategy you have, try seeking the guidance of an accountant or small business mentor. 

 

 

PASBA member accountants bring the collective resources of a nationwide network of Certified Public Accountants, Public Accountants, Enrolled Agents and other practitioners available to answer your tax and financial questions and streamline your business accounting, bookkeeping, and payroll operations.

 

To find a trusted accountant in your area, visit www.SmallBizAccountants.com.

 

Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230.

 

Copyright Information 2013 Professional Association of Small Business Accountants

 

 

 

 

 

 

 

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