When jcpenney announced its Fair and Square pricing last January, investors cheered, sending its stock

up. But several months later, the company delivered disappointing results: Store traffic had declined by 10% and sales by more than 20%. What went wrong? Our marketing isnt doing the work Weve got to get our pricing across, jcpenneys CEO, Ron Johnson, commented at a press conference discussing the quarterly results, adding that consumers need to understand the value were offering. But was it just a matter of miscommunication? Or did jcpenneys marketing team make a mistake by getting rid of the frequent deep-discount sales that consumers have associated with the company for decades? The idea behind the new pricing strategy, which involves reducing the base price of all items by about 40% and eliminating deep discounts, is simple: The customer knows the right price for every product, so we are going to price things right from the start, Johnson said. Jcpenney vowed to price its merchandise so that customers will not pay literally a penny more than the true value of the product. Sounds straightforward even enticing. What consumer wouldnt subscribe to the idea of paying a price that reflects a products true value? But there are several flaws in this strategy. True value is subjective. Because customers have varying needs and financial resources, they differ in the amount of money they are willing to pay for a given product. True value means different things to different people. Given jcpenneys diverse customer base, finding a single true price is a challenging task. True value is relative. Consumers often use the regular price of an item to determine its true value. Consider a store offering a pair of jeans priced at $20 and another offering a pair of $30 jeans on sale for $20 (a 33% discount). In which store will customers perceive they are getting greater value and be more likely to make a purchase? For many customers the $10 discount underscores the value they receive from the purchase. Jcpenney might be wrong in arguing that because less than 1% of its revenue comes from items bought at full price, its original prices a re pretty much meaningless. Fair often means cheap. Imagine that a customer has purchased a pair of Levis 550 jeans at jcpenneys everyday low price of $40 (jcpenney now rounds off the .99 price endings). A few days later, she sees the same pair of jeans on sale at another department store for $34.99 a notunlikely scenario. Does she still think of jcpenneys pricing as fair? Even if consum ers concede that higher prices can be viewed as fair, do customers prefer fair prices to low prices? Fair prices to customers or to shareholders? Jcpenneys primary responsibility is to its shareholders, not its customers. This might lead to a conflict when customers view of whats fair means prices that are at or below jcpenneys costs. Therefore, despite its best intentions to offer fair prices, jcpenney cant let customers dictate prices. No discounts means higher price image. Consumers are often unaware of the prices for individual items and instead rely on their beliefs about the average level of a stores prices. Because sales are one of the factors that influence these beliefs, discontinuing them is likely to raise jcpenneys price image. As a result, instead of being perceived as beneficial, the elimination of sales promotions might have the opposite effect on jcpenneys price-conscious customers, lowering the likelihood that they will return.

Sales create customer value. Discounts tend to create additional value for many consumers who enjoy searching for and finding deals. Therefore, jcpenneys prices may need to be substantially lower to compensate for this extra value (referred to as transactional utility in behavioral economics) that customers used to receive from sales. It is difficult to break from the past. Jcpenney has been known for its frequent and deep discount strategy, offering about 590 sales events last year alone. So what are customers to think about jcpenneys pricing during the past few decades? Was it unfair? Do they perceive the new concept of Fair and Square pricing as credible and buy into it, or do they regard it as yet another retailing gimmick? So the drop in jcpenneys store traffic and sales volume might not be just an issue of miscommunication. The real reason why consumers dont get jcpenneys strategy might be that its pricing is misaligned with the needs and shopping habits of its core customers, who have become accustomed to frequent sales. For the past several decades, most department stores, including jcpenney, have spent billions of dollars trying to educate consumers to take advantage of ongoing sales. Jcpenneys own data suggest that customers hunger for sales has increased dramatically over time, such that discounts of 60% are now required to get shoppers to buy, up from 38% 10 years ago. And even though it is true that the sales promotions run by most department stores defy common business sense, both in terms of volume and content, jcpenneys fair and square pricing might have gone from one extreme to the other.

Every once in a while, someone dares to question the status quo and look at a challenge from a new perspective. These people are never met with a warm reception. Rather, they are left alone in their thoughts and singled out as trouble makers. After all, if the majority hasnt already thought of their idea, they must be wrong. Ron Johnson very well may be one of these people. Acting as the new CEO of J.C. Penney on February 1, 2012 J.C. Penney dared to do the unthinkable: Eliminate sales and introduce a flat pricing model called Fair and Square. Also, J.C. Penney launched a new brand, a new spokesperson and new marketing push. Just over one year later with sinking profits and scared investors, the entire concept was deemed a complete failure. Despite his best efforts, Johnson was sent packing. How could the Genius behind the Apple Store (joke intended) get it so wrong? How could he lose billions in sales and captain a ship that lost half its stock price? JCPs every day low pricing may look like a complete failure, but it didnt fail because it was a poor idea. It failed because it didnt have enough time. For years, mothers have instructed daughters to shop sales and never pay full price. Those daughters grew up and taught the same to their daughters. What department stores started as a simple way to encourage spending bursts, ended up becoming a monthly, then weekly, then daily trend. This pricing model became an expectation and trained consumers to never buy at full price, even if the store has what theyre looking for. When you market well and offer the product your customer wants but still cant make the sale without offering a discount, there is no hope for any company. Ron Johnson saw this trend. He saw the bleak future, and he was sure he found the fix. Fair & Square pricing changed the department store concept with which we are all familiar. Like every new idea it appeared radical, risky and was met with resistance. Ron Johnson likely would have changed the game entirely, but it could have taken five years or more to catch on, and no one is that patient. Speaking on creativity, this is a common theme I see every day. Companies envy other more innovative companies and wonder why their team cant come up with the same break-through ideas. What they dont know is that they have the very same talent. The difference is, their culture kills any creativity or innovation. They discourage failure and experimentation while innovators embrace it, trying new unfamiliar things. What would happen if James Dyson had a boss who fired him within a year of his first prototypes? His company certainly wouldnt have made $1 billion in revenue. Much worse, I wouldnt have my Dyson Ball that I love. Thousands of innovations and ideas have come from cultures that allow failure, allow experimentation and trust their leader. J.C. Penneys failure wasnt in trying a new idea; it was their lack of trust in the leader that could have taken them to new heights. Hopefully they learn from this failure, before its too late.