J C Penney Pursues Re-positioning

If you read the news reports or what J C Penney’s new CEO Ron Johnson said at a recent interview and you came away saying to yourself “WOW, the retailer is adopting a whole new pricing strategy, the every day low pricing”, you could not be faulted. But you would have missed the real story. JCP is in trouble because fewer customers are coming to its stores, and when they come their purchases are smaller. That is the story of many retailers during this recession and now slow economic recovery. But JCP has not participated in the recovery as well as some of its competitors. Meaning it isn’t just the poor economy but rather some other things have changed and the retailer needs to adapt.

Retailers must bring people to stores first and then have them buy at the store. Prices are absolutely crucial for the customer to spend her dollars at the store. Too high a price relative to competitors and the customer walks out faster than she came in. And that is why JCP insists that its prices now will be 40% lower than what “regular” prices were in the past. So, the customer will pay close to what they paid in the past when the stores ran sales or promotions. Will it be lower than all competitors? Probably not, but then once you are in the store you might decide not to walk out unless the price was so high that a trip to another store would be worth the trouble. But will the new price be attractive enough to get customers to JCP in the first place?

And here is where Mr. Johnson is hoping to score one by going for “something old, something new, something borrowed…”. He is borrowing from his tenure as Senior VP of Retail Operations at Apple. People are attracted to Apple stores not because of low prices but because of an experience that is unique.* And Mr. Johnson hopes to create a unique experience with his Town Square and specialty shops. This is smart because it gets away from using price as the main tool to drive store traffic. And competitors can’t match quickly or completely. But will customers value this experience? Don’t know. We have to see the concept at work and see the execution. So it remains a challenge for JCP management but one that will pay off big if done right. I say that because not only must customers value the experience but also JCP must create it at a cost that makes it more profitable than periodic sales to attract customers. Yes, it is new to JCP. But as an idea it is old. Professor Lal of Harvard Business School and I made the point back in 1997 that Every Day Low Pricing (EDLP) can be a smart positioning strategy. JCP’s is a positioning strategy because just as customer experience at Apple stores makes them unique and different from competitors the new format of JCP is meant to show it in a different, and more exciting light, than competition. That should drive store traffic. I think Mr. Johnson’s action carries some risk but one that I deem worth taking and whose outcome I will watch with anticipation.

* See my blog on Apple Stores

NETFLIX: dual branding or pricing problem?

Qwikster is for movies on DVD and Netflix is for streaming video content. This is quite different from Toyota and Lexus or Honda and Accura. It is more like Walmart and Sam's warehouse club. When Toyota decided to have the Lexus brand, the customers for each brand were different and the two brands prevented any confusion in the segmented market. Walmart and Sam's often serve the same customer on different occasions or different types of shopping trips. But at the heart to of this segmentation strategy is the fact that on any one occasion the customer visits only one store and so both assortment and pricing can be different at the stores.

Now let us turn to Netflix. The customer orders DVDs and streaming content on the internet and prefers a single website with a single sign in. She may even order both at the same time. The real problem for Netflix has been the flat price strategy. Adding streaming content to DVD's without rethinking pricing has landed the company in trouble. And what is more, it has lost control of its value proposition. Ideally, each time a person goes in for the streaming they should be charged a variable price. Or like the cell phone companies there could be tiered pricing with various options. There really does not seem to be any need for two brands. Netflix should learn from i-tunes which used to have a 99 cent a song pricing strategy and then changed it, for good and for better. A couple of years ago I discussed a paper at the QME conference and the question of uniform price for all songs was the topic. Of-course such a strategy is not a good one.

Why grocery stores worldwide are dropping double coupons

Tesco in the United Kingdom joins by discontinuing double points on their Club Card. Back in April Kroger stopped doubling and tripling manufacturer coupons at its Houston area stores. What is going on? One reason manufacturers drop copons is so they can charge lower price to price sensitive customers. Retailers have been piggybacking on this instead of incurring the cost of dropping their own store coupons. They identify price sensitive customers and attract them to their stores by doubling and tripling coupons.

But now they seem to be having second thoughts. Why? It is because of the recession. During a recession, especially one as long and severe as the current one, there are too many price sensitive customers. A better strategy is to lower price to ALL customers then. That is what is going on now. And it has the advantage of not yielding control over pricing to manufacturers. This is a problem that is well known as my research with Krishnan demonstrated in the nineties.