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Why J.C. Penney’s everyday low prices is a bad idea

June 9, 2013 - Monetization

Ron Johnson – new CEO of J.C. Penney – has announced that the department store chain will carry a new pricing strategy. Instead of numerous promotion days throughout the year, J.C. Penney will have low prices all year long. This is a reaction to J.C. Penney’s brand unawareness between the low-price competitors the likes of Walmart and Target and luxury brands of clothes (http://nyti.ms/xuuy1Z).

The goal of this strategy is to increase the number of times customers come back to the department store and, ultimately, increase the number of purchases and revenue. But will this strategy work? What does J.C. Penney have to offer besides its now lower pricing? What is the differentiating factor?

Let’s take a look at two department store chains in the Netherlands (Vroom & Dreesman, www.vd.nl and De Bijenkorf, www.debijenkorf.nl) that may be held to similar regard as J.C. Penney.

One of these two chains is immensely popular amongst shoppers for their annual three-day promotions. During these three days, the shops look more like warzones as shoppers fall over themselves to get the best bargains. As a self-proclaimed bargain hunter, I safely say that nothing beats the feeling that one has bought something at a price under its “actual” value (how self-deceiving that may be). How will the bargain hunters amongst J.C. Penney’s customers feel? A conceivable possibility would be that they might feel cheated as prior pricing apparently did not reflect the value of the clothes.

Foot traffic is something that department stores need in abundance in order to survive. The vast fixed investments into prime real estate on great locations is a heavy financial burden. The other Dutch department store chain has chosen to engage into a meaningful partnership with a perfume store chain (www.iciparisxl.nl). In this case, the perfume store chain gets a designated spot within the department store and is allowed to operate as if it rented space in a mall. Partnering up and leveraging the value network brings two distinct win-win advantages:

  1. Shared costs: The department store may incur some opportunity cost since space is rented out to a partner, however, the increased foot traffic and rent gains should cover, and ideally exceed, that opportunity cost. The perfume chain gains a prime location with a lesser financial burden
  2. Shared foot traffic: Secondly, both the department store and the perfume store chain benefit from each others co-location through the sharing of foot traffic (shoppers for clothes may well buy some perfume on the way out, as shoppers for perfume may want to buy some clothes).

So will the pricing strategy of J.C. Penney hold in a market in which real low prices already exist through its competitors? Perhaps. Nevertheless, leveraging one’s value network may provide more sustainable and attractive strategies.

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