• by Matthew Willcox , April 15, 2013

In November 2011, in an attempt to invigorate their brand, J. C. Penney Company hired Ron Johnson as CEO, the executive largely responsible for Apple’s retail success. It seemed a smart move. What better place for a tired, frumpy retailer to seek a new leader?

But just 16 months later (in April of this year), JCP ousted Johnson after experiencing its worst sales year in decades, recording a record net loss in the all-important fourth quarter of $552 million.

What happened? What went wrong? What did JCP and its highly touted new leader do to engineer such record losses? 

Critics suggest that their desire to radically transform the brand led to ignoring existing customers. Maybe. But perhaps a bigger factor in the failure wasn’t in ignoring their customers, but in ignoring human nature.

Fair and square every day?

Early under Johnson’s leadership, JCP detailed its plan to reduce complexity in its pricing. Price tags would feature round dollar amounts sans cents -- e.g., an item formerly priced at $19.99 would now be priced at $20. Discount pricing would be abolished -- meaning items would go on the floor from day one at the “discounted” price. Thus, price tags would no longer mention the higher price at which the goods had been sold (behavioral economists call this a “reference price”). These tactics were packaged by Penney as “Fair and Square Everyday Pricing.”

Anyone reasonably versed in understanding decision sciences, behavioral economics, or cognitive pricing should have been concerned by this approach, even if it was -- as is most likely the case -- endorsed in focus groups or quantitative studies among customers and prospective customers.

Reason vs. motivation

While all of these pricing initiatives make sense at the rational level, that’s just not how humans make choices -- whether the humans are JCP shoppers, or anybody else on the planet. Most market research doesn’t help because it simply asks people their reasons for doing something rather than revealing their motivations for doing so.

Thus, it’s not surprising that executives in companies will too often choose a marketing approach that appeals to consumers’ logic or their stated preferences over one that appeals to the intuitive mechanisms that drive human decision-making. 

Human decision-making systems use shortcuts -- called heuristics -- that enable us to deal efficiently and effectively with the millions of choices we make. When a choice seems “intuitively right,” we make it more quickly, and often feel better about it. But when asked, we often post-rationalize it in some way.

Some commentators on the failure of JCP’s “Fair and Square Everyday Pricing” suggest it didn’t work because consumers like complexity in pricing. That’s a conclusion that misses the point. It’s not that people like complex prices, it’s that consumers like easy decisions that “feel” right. Ironically, the right kind of complexity can help with that.

JCPenney’s mistake was that in creating a pricing approach that seemed simple from a rational perspective, they stripped out the cues and additional information that lead to easy and intuitive decision-making. The absence of reference prices may have been one of the most significant factors. By removing reference prices or anchors, JCP took away a tool that helps consumers make intuitive decisions about value.

Loss of pennies

And by rounding prices up -- by doing away with the pennies -- Penney’s may have made their products seem more expensive. In his book The Psychology of Price, pricing consultant Leigh Caldwell talks about how being just below the dollar mark (say $19.99) means the consumer unconsciously puts the product in the “below $20 band,” whereas a price at $20 puts you above that band.

Finally, JC Penney went from having sales events to a three-tiered pricing system: (1) Every Day, (2) Month Long Value (theme sales such as back-to-school-related products in August), and (3) Best Prices (clearance). This approach offered the shopper value, but not in a very motivating manner. 

From a psychological point of view, sales may be as much about creating a sense of urgency and scarcity as offering bargains. In his book, Influence the Psychology of Persuasion, Robert Cialdini identifies scarcity as one of the six universal principles that drive our choices. By taking limited-time events out of their mix, Penney's neglected this powerful influence.

A tumultuous year and a record-making loss later, JCP is correcting its mistakes. But mistakes like these can be avoided in the first place by using behavioral and decision sciences to ensure strategies are in tune with how the human mind works, rather than battling against it.