When Fairness Backfires

The J.C. Penney logo
J.C. Penney has struggled after introducing new “fairer” prices this spring.

In most money matters, it pays to be fair. (Certainly when paying back your friends.) But when big businesses try to be fair to their customers, sometimes it can backfire in a big way.

Take J.C. Penney. Back in February, they hired a new CEO, Ron Johnson (who built Apple Inc.’s retail operation) to revamp their declining sales. The department store chain then made some radical changes to their pricing.  They eliminated coupons, got rid of confusing fine print, and cut back from over 500 sales a year to just 12. The goal was to make shopping simpler, more transparent, and fairer for consumers.

Five months later, sales are tanking and stock prices have fallen more than 30%. But why? And is it possible for a company to be honest and still turn a profit?To be sure, there are other variables involved that may contribute to J.C. Penney’s rough quarter. The company has been aggressively rebranding itself, and not without controversy: its choice of Ellen DeGeneres as spokeswoman made headlines after it sparked a boycott from anti-gay organization One Million Moms. However, given that the member count of One Million Moms is considerably less than one million – as of writing, the Facebook group has under 50,000 likes – it seems likely that the problem is not just PR.

This simple no-nonsense pricing approach may have worked for Apple’s users, but that consumer may not be the same type of customer that shops at J.C. Penney. At Apple, people generally know the brand, and what product they are looking for before they walk in and shop. Apple also has a very universal pricing structure – that phone you want is going to cost the same if you go to the Apple store, or your nearest Wal-Mart. Clothes shopping? Not so much. Prices can drastically vary from store to store when it comes to the same item.

So what’s the issue with simplified prices at a store like J.C. Penney? Two things. One: they eliminate the excitement of sales-hunting and coupon-clipping, which can be an important factor in actually getting people into the store. And two: by offering products at one steady price, rather than many changing prices, J.C. Penney loses the opportunity to give the illusion of finding the absolute lowest price on a item within the store. (Ever talk yourself into an impulse buy for something that you don’t need, only because it’s on sale? I sure have.)

As Bob Sullivan puts it in an editorial on MSNBC.com:

To oversimplify for a moment, here’s Penney’s problem. They told the world that retailers only offer their best prices during crazy sales, and Penney stores would no longer host them. Sensible consumers apparently took that information to heart and decided to simply wait for such sales at other stores. As an added benefit, Penney lowered consumers’ search costs, because they now knew they didn’t need to bother driving to a Penney’s store anymore.

Harsh. But it does make sense: in a rough economic climate, shoppers generally look for the best deals, not for the best shopping experience.

So how can a company play fair and still succeed? Well, that’s an open question, and it’s still possible that the J.C. Penney strategy will succeed in the long run. After all, J.C. Penney is trying to build a brand around transparency and simplicity. If they succeed at convincing shoppers that J.C. Penney is the fairest, friendliest place to shop – a business that truly looks out for the consumer first – they may see customer loyalty improve, which would help their numbers to recover and grow over the coming months. Only time can really tell if this “simple, fair and transparent” pricing strategy will work for them in the long run.

Either way, it goes to show how hard it can be to build a company that’s fair and square and still keep the consumer base it’s fighting for. As long as this pricing structure stands, J.C. Penney will have my customer loyalty for life. Then again, maybe I’m biased because that’s the Splitwise strategy 🙂

Published by

Ryan Laughlin

CTO @ Splitwise, the app that makes sharing expenses easy.

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