By Robert Estupinian
Last week J.C. Penny announced it would be changing the way that it will price its merchandise. No longer will the company be offering sale prices. Instead the retailer will be slashing all prices by 40% and keeping them there.
Previously, the company would hold hundreds of sales every year, and their customers began to wait for the sales before buying. The sagging numbers suggested that perhaps customers were not coming back at all.
In this weak economy consumers have shown they are willing to spend, but only if they find value. So, now J.C. Penny will have to get their customers to believe the prices offered everyday do provide good value without the sale tag.
What Does Behavioral Economics Have To Say About This Idea?
In this blog we have often looked at the work of Dan Ariely, behavioral economists and author of Predictably Irrational to gain some insights into these situations.
People Have trouble judging value
Behavioral economists have demonstrated that people have trouble judging the value of any given item. Therefore, consumers use “framing” as a reference point in determining if something has value or not.
We have all witnessed this behavior ourselves. When we see a washer that was $800 marked down to $400, it appears to be a great deal. However, if that same washer was priced at $400 initially, we would be less compelled to buy it.
To test this theory out, Dan Ariely and fellow behavioral economists asked MBA students to write down the last two digits of their social security numbers. Then the students were asked to bid on a number of items, including a bottle of wine. Students with the highest numbers bid 200 to 350 percent more than students with the lowest numbers.
The Lesson for Your Business
Our customers have difficulty establishing value on their own. They need a reference point in order to determine value. Without a reference point customers may be waiting for a “sale” to help them open their wallets and purses.
Many businesses have difficulty with pricing their services and products. There are a host of things that go into determining the best price. In the case of J.C. Penny they are combining this price reduction along with the introduction of new merchandise, new logo, and a new celebrity spokesperson (Ellen DeGeneres).
In their case management is combining various variables at the same time. This may make it difficult to fully understand which treatment had the biggest effect. However, given the sagging numbers this may be the only approach they can take.
Pricing issues are just one of the many items members of Bay Area Mastermind have the opportunity to discuss and develop at our meetings. Every member is provided with the latest research and strategies to grow the profit in their business in any economy. Why not take a test drive and see for yourself how your business can thrive from a professionally facilitated Mastermind Group.