Penney unwise to be dollar foolish with customer expectations

When the board of J.C. Penney ousted its chief executive Ron Johnson, you might say it was, in some small way, because he did not understand Tracie Fobes.

Fobes plans her meals around discounts offered at the grocery chain and always checks coupon apps before buying clothes. When, a little more than a year ago, J.C. Penney stopped promoting sales and offering coupons and instead made a big deal about its "everyday" low prices, Fobes stopped shopping there. It was not that she thought the prices were bad, she said, she just was not having any fun.

"It may be a decent deal to buy that item for $US5," said Ms Fobes, who runs Penny Pinchin' Mom, a blog about coupon strategies, "but for someone like me, who's always looking for a sale or a coupon, seeing that something is marked down 20 per cent off, then being able to hand over the coupon to save, it just entices me," she said. "It's a rush."

Devoted coupon users like Ms Fobes might be more frugal than the typical consumer, but most shoppers, coupon collectors or not, want the thrill of getting a bargain, even if it is an illusion.

In recent months, Penney recognised that irrational human trait and backtracked, offering coupons and running weekly sales again - and it began marking up items to immediately mark them down for the appearance of a discount.

The switch came too late to make Penney's numbers look better - its sales fell by 25 per cent lats year, to $US13 billion ($12.4 billion) - and too late to help Mr Johnson. And Penney's failure to wean consumers from sales and discounts probably will not stop retailers from trying to simplify pricing - but it should make them pause for thought.

Simplifying pricing is not that simple. For sellers, setting and holding one price makes sense.

"You're always going in and changing prices, and that takes manual labour," a retail practice leader at the accounting firm Marcum, Ronald Friedman, said.

"Also, if you have one price, you have a better feel for expected margins and gross profits; you can manage your budgets a lot better, and it's more efficient."

Last year, while introducing his plan to investors, Mr Johnson said that in the previous year the company held 590 sales events; almost three-quarters of the goods it sold were marked down by half or more. But customers were not actually paying less. Penney simply kept raising the prices customers saw on the shelves and then discounted them in promotions. So, why keep playing a game that is expensive and troublesome for the seller and a mirage for the consumer?

In 2006, Macy's had a similar idea after acquiring the coupon-happy May department stores. It drastically cut coupons but, by 2007, it had abandoned that strategy, with its chief executive acknowledging it had been Macy's biggest mistake in its acquisition.

The problem, economists and marketing experts say, is that consumers are conditioned to wait for sales, partly because they do not have a good sense of how much an item should be worth to them.

"J.C. Penney might say it's a fair price, but why should consumers trust J.C.Penney?" Northwestern University professor Alexander Chernev, wonders. "At the end of the day, people don't want a fair price. They want a great deal."