Can J.C. Penney succeed like Target and Apple?
Now that J.C. Penney has announced a radical overhaul of its approach to retail, the question is: Will customers buy it?
Penney's new CEO, Ron Johnson, is rolling out a simplified pricing plan that aims to wean customers off sales and convince them that she store's prices are always rock bottom. He says prices will be slashed by 40 percent, and for the most part that's where they'll stay. That's a big change from the current strategy, which involves literally hundreds of sales every year.
Johnson has a great track record. He's the retailing mastermind behind the Apple retail stores as well as Target's transformation into "Tar-zhay" - the store's partnerships with upscale designers that made it chic to be cheap.
The challenge for J.C. Penney will be to wean retail customers off the idea that it's not a bargain unless you see a sign spelling out the price cut. That's difficult in a weak economy in which consumers have shown they are only willing to open their wallets for good values. And there's a more deep-seated problem, as well.
Behavioral economists have found that people have trouble judging the appropriate value for a given item. So we look for an "anchor" to help us start our calculations. When we see a flat screen TV that used to cost $1,000 marked down to $500, that, of course, seems like a great value. If the same television were priced at $450 to begin with, we are less compelled to buy it.
An experiment at MIT showed that this effect, called "framing," is so powerful that even random numbers can cause people to pay more for an item. Dan Ariely and fellow behavioral economists asked MBA students to write down the last two digits of their social security numbers and then 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 stock market's verdict on Johnson has been mixed. On the one hand, J.C. Penney shares are up 14 percent since he took over in June, far outpacing the broader market. But the stock took a hit as he presented his new strategy yesterday.
At Apple, Johnson created the single best-performing retail spaces in the country, if not the world. Apple's sales per-square-foot, which have been calculated at $5,600 to $7,000, are twice that of Tiffany. At J.C. Penney, he won't be selling iStuff, however. Sure, he's likely to revamp the product offerings (the website's electronics section currently features a boombox iPod dock; so there's some low-hanging fruit)
To help Johnson make the sale, a new ad campaign features a customer screaming "NO" as she is deluged with coupons and for-sale signs. Ellen DeGeneres is the new spokeswoman, and a the store is even rolling out a new logo.
To see Jack Otter discussing the new J.C. Penney pricing strategy on "CBS This Morning," click on the video in the player above.
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Jack Otter is Executive Editor of CBS MoneyWatch.com. Prior to the launch of MoneyWatch, he served as deputy editor of Best Life magazine and as features editor of SmartMoney magazine. Otter's writing has appeared in The Wall Street Journal, O magazine and The New Yorker. His book, Worth It...Not Worth It: Simple and Profitable Answers to Life's Tough Financial Questions, hit bookstores in May.
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