The Pricing Conundrum – Has anyone ever got it right?

Recently, purists were pained to see the exit of Ron Johnson from J.C. Penney. Johnson tried to carry out an experiment of fixing J.C. Penney’s pricing, which had been using too many discounts. Johnson perhaps believed that offering discounts on artificially inflated prices was simply not ethical and diluted the brand of J.C. Penney. But alas! The brand Penney had already been diluted and customers came to Penney precisely because of the large discounts on offer. So, when Johnson came up with a clean and clear cut pricing, sales dropped. Many people believe that Johnson did not listen to the customer, which is why his new pricing strategy failed. Customers are mostly lured by discounts, which leads to a very interesting conclusion (amongst many others) - is price always about perception?

In the minds of consumers, had J.C. Penney’s fate already been sealed as a “discounts” retailer? And no amount of re-branding and re-organizing J.C. Penney would help in clearing up that perception? Or maybe, J.C. Penney needed to wait longer. Perception, unlike reputation cannot be destroyed in a day.

The next fundamental question that I had on the topic of pricing is “Do customers really know the value of the goods that they buy and, if unaided by a price tag and packaging, can they really differentiate between products that look similar?” I am sure different people with different objectives would have carried out this experiment multiple times, but to prove a point, one of my ex-colleagues, who is an authority in the field of pricing in Retail, set up this simple experiment:

He removed cookies of three different brands - one discount, one mainstream, and one upscale from their packaging - and placed it in front of a group. He then asked each member of the group to see and categorize each of those cookies in the ascending order of what they thought would be their prices. He had the results recorded from the “price guessing through observation” exercise, as he called it. He then asked the group to consume the cookies and then arrange the cookies in ascending order of what they thought would be their prices. He had the results recorded from this “price guessing through consumption” exercise as he called it.

Interestingly, in the “price guessing through observation” exercise, no one got the ranking right. Thus by observation of the unpackaged products, consumers were unable to distinguish between a higher value product and a lower value product. In the “price guessing through consumption” exercise, the consumers were unable to distinguish between the two more expensive brands – “mainstream” and the “upscale”. Most could separate the “discount” brand.

Some very important learning comes from the above experiment. First, with fancy packaging and branding, you can dupe customers once, but not twice. Customers have an inherent sense of value, through which they are able to distinguish between a good product and a bad product, after consumption.

Second, if you have a product which is good enough and have stood the “consumption” test of the consumer, you can compete against the good brands. What is it then, that differentiates the price that you can command for a comparable product vis-à-vis another competitor?

The answer lies in a third experiment which my friend conducted and which he called the “price training of consumers”. He put two brands which the consumers could not distinguish in the consumption test – the “mainstream cookie” and “the upscale cookie” into similar looking jars and for the next five days, he put a higher price tag on the lower value cookie and a lower price tag on the higher value cookie. He also announced that his consumers (who were part of a 10-day Retail workshop that he was conducting) would now need to buy the cookies for breakfast- he forced them to buy the cookies by offering them nothing until lunchtime and they could secretly buy whichever cookie they wanted (only he was watching)! Some people bought the 5 dollar cookies, while others bought the 10 dollar cookies. You would have thought that the ones with the fatter paychecks would have bought the 10 dollar ones and vice versa- well no! It turned out that there was no correlation between the paychecks and the cookies that people bought. But, what was found was that soon people settled into a routine – the same set of people bought the 10 dollar cookies and the other set bought the 5 dollar cookies and the buying behavior stabilized over time.

Thus my friend had trained people to believe that a product which actually cost less in the market, was more expensive and hence, in their perception had higher value. This is called “Price Training” of consumers and is the secret behind how, many big brands have trained unwitting consumers to believe that the price that they pay for certain products from their stable, is worth the money they shell out.

Since, the experiment was very controversial, my friend did not publish the results. He works for some large brand! There were some other startling conclusions - the person with the fattest paycheck in the group and the sponsor of the workshop was secretly buying the five dollar cookies, but at breakfast, he bragged that the 10 dollar cookies really tasted better than the 5 dollar ones. There were more, which are probably relevant for another follow up article!

So, when I saw J.C. Penney get rid of Ron Johnson, I could not hold myself back. At considerable risk to my own future career with big brands, I decided to make these details public as I feel that Penney did not give him enough time do “Price Training” of consumers. And by the way, it is much easier to “Price Train” people on cookies than on clothes!

I will end this article by conveniently misquoting Oscar Wilde, using my literary license (if any such thing exists) and declare that “One who knows the price of everything, knows the value of nothing!”

Tags: Pricing and Promotions, Retail, Buzzwords

Snehamoy Mukherjee

Snehamoy is a part of the Strategic Leadership Team at Axtria, a New Jersey based Analytics firm, where he is responsible for business development, solution development, delivery leadership and strategy formulation.