Pay More at Penney's now, and Pay Less Later

In theory, J.C. Penney (NYSE: JCP  ) CEO Ron Johnson had the right idea. He eschewed the false marketing strategy that retailers employ of marking up their prices so they can discount them later on and claim, "We're having a sale!" He figured that in rough economic times, the low-price-everyday policy that's served Wal-Mart so well would resonate with its shoppers, too.

Wrong! In what will likely become a case study in Marketing 101 classes for years to come, shoppers fled the department store chain in droves, driving down revenues 25% last year. Shoppers turned instead to retailers like Macy's, which routinely practices the illusory price-cutting scheme, and would never think of abandoning it; Macy's saw sales jump 5% in 2012. 

Well, Penney's has finally seen the error of its ways, and is reintroducing the old mark-up-to-mark down pricing strategy for its own brand of clothes. Thus, shoppers, instead of finding a t-shirt priced at $5, will now see it tagged at $6; but because "we're having a sale!" they'll be able to buy it for $5.

You can almost see the looks of incredulity on the faces of Penney's executives as shoppers respond to the new pricing scheme. Yet, just as marketers will tell you that there's a psychological gain to be realized from pricing a product at $295 instead of $300, shoppers want to believe that they're getting something special, and few things do that better than scooping up a pair of jeans "on sale."

There's no proof yet that simply rejoining the crowd behind the curtain, and acting the part of the Great and Powerful Oz by lowering prices, J.C. Penney will get customers to return; but retailers everywhere have learned an important lesson: There are some things you don't mess with. Removing a key, powerful motivator from the equation is one of them.

Over the rainbow

J.C. Penney has been a train wreck whose comeback always seems just around the next earnings corner, but investors are beginning to doubt that CEO Ron Johnson can weave the same magic that he did at Apple. If you're wondering whether J.C. Penney is a buy today, you're invited to claim a copy of The Motley Fool's must-read report on the company. Learn everything you need to know about JCP's turnaround -- or lack thereof. Simply click here now for instant access.


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