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Trend Alert: The Customer Sets The Price

Trend Alert: The Customer Sets The Price
April 1st, 2012

Pricing has always been an act of give and take between consumer and retailer, but retailers have always had more power on their side. However, this power balance is quickly shifting to be in favor of consumers thanks to the Internet and shopping-comparison apps. Consumers are increasingly choosing to haggle over prices.

If retailers aren’t willing to engage in this process the customer will walk away. if they know they can find a cheaper price elsewhere. Amazon and eBay are becoming increasingly popular options. This is why most retailers are now willing to price match given adequate evidence. However retailers are having to scramble to create pricing schemes that will still allow them to make money.

J.C. Penney has introduced a new pricing scheme in which they have daily prices, lower monthlong specials and clearance prices. The fashion retailer, Mango has decided to cut all prices by twenty-percent. Stein Mart has decided to reduce the number of coupons they issue and simply reduce prices. Even Walmart has pledged to meet competitors prices if they mark their values up too high.

J.C. Penney’s chief executive Ron Johnson said, “the customer knows the right price, we can raise the prices all we want; she’s only going to pay the right price. And why is that? Because she’s an expert.”

If you want proof of this proclamation all one needs to do is look at the past numbers. Higher prices did not lead customers to spend more. An item that cost $10 for JC Penney’s to produce was priced at $28 in 2002 and $40 in 2011, but the average price the customer paid for this $10 product was $15.95. This shows that customers won’t really consider buying items until they go on sale.

According to experts the average markup for apparel at a department store began around 65 percent. Then over an average of about 10 weeks the department store would begin marking prices down 25 to 30 percent off, and then 50, then 60 and finally 70 percent off, it got to the point where they would sell things below the company's cost.

Thanks to this process shoppers know that they should wait for things to go on sale, because they know things are ridiculously marked up when they first come out.

J.C. Penney’s new pricing program is hoping to break consumers of this habit and is depending on its success in order to help turn their company around.

They’ve cut their prices by about 40 percent of what they were before the turn around. They are rounding prices up to the nearest dollar. After that first tier of prices are specials which are set to last a month rather an a day or two. The third tier is clearance items which go on sale the first and third Friday of every month.

While J.C. Penney is calling this program fair and square pricing, some consumers miss the ways things were. Employees are having a difficult time explaining the pricing program and experts say that there are reasons why stores have stuck with more traditional strategies for so long. Consumers are more likely to come into a store if they have a coupon, like to see items marked a certain percentage off from the original price, and are more likely to pick up a shirt for $19.95 than $20.

In fact, American Airlines attempted to implement a similar pricing program two decades ago and quickly abandoned the program within six months. Similarly, Macy’s decided to try and reduce the number of coupons they issued a few years ago and quickly came to the realization that consumers love coupons.

The truth is discount hunting has become a real sport that people like to engage in. It appeals to people’s competitive nature and lets them feel like they are getting really luxurious items for less. But with the introduction of price comparison via the Internet and smartphone apps, stores have no choice but to try and change things in order to keep up.

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