What Shoppers Can Learn From JCPenney’s Loss

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I recently read an article about JCPenney’s dismal sales numbers this year: “Last year, the company made $64 million in the first quarter; this year, it lost $163 million.”

I wasn’t surprised.

In February, JCPenney launched its new “Fair and Square Pricing” structure. They did away with coupons and random sales in favor of everyday low prices and a predictable schedule for sales.

Before I explain why I expected JCPenney’s plan to flop, let’s take a look at the research of MSNBC’s Bill Sullivan. He argues that Fair and Square Pricing failed because…

  • It eliminates shrouding, an economic principle applied throughout the retail industry. That’s when stores trick shoppers into believing an item is cheaper than it really is by “shrouding” related costs. Sullivan cites computer printers and hotels: A deal on a printer isn’t necessarily a deal after you account for the recurring cost of those pricey ink cartridges, and a deal on a hotel room isn’t necessarily a deal after you account for all the hidden fees. While shoppers complain about it, shrouding is used by many stores because it works – as JCPenney’s first-quarter losses prove.
  • It eliminates anchoring, another retail industry trick. That’s when stores inflate an item’s price just so they can then mark it down, knowing that more shoppers will be attracted to the item simply because the price seems to have been reduced. Again, they wouldn’t do it if it didn’t work.
  • It eliminates price discrimination, which is a common practice among couponers and other bargain hunters. “Some people have more money than time, and some have more time than money. Some shoppers don’t mind spending hours to save $20; others would gladly give a store $20 to escape quickly,” Sullivan explains. “By killing couponing, Penney has eliminated its ability to satisfy price discriminators.”

Sullivan’s second and third points are sound, but I disagree with him on shrouding. JCPenney doesn’t sell printers or hotel rooms. I can’t think of anything they sell that would have much of a hidden cost besides dry-clean-only clothing and perhaps appliances. I think Fair and Square Pricing failed mainly because…

It eliminates the psychological effect of sales. Every study I’ve read about impulse shopping cites “sales” among the top reasons for impulse buys. When you spot an item on sale, various factors tug at your subconscious – and your wallet. You might not know when the sale will end, or maybe you know it will end tomorrow. You certainly don’t know when the item will go on sale again – or whether that sale price will be more or less. You could sleep on the decision and come back tomorrow, but you know another shopper could snag the last one. The psychological effect of these unknowns is strong enough to support the evolution of new sales subspecies, like daily deals and flash sales.

But it doesn’t really matter who’s right about JCPenney’s first-quarter losses.

I read retail analyses because, even when they’re intended for retail professionals, shoppers can learn a lot about themselves. Such articles offer a look inside the mind of the shopper and the store. When someone explains how stores trick us into spending, we’re empowered. We can use this knowledge of “enemy” tactics to arm ourselves against inflated and unnecessary purchases. It’s harder to fall prey to retail tricks when you know how to recognize them.

If you’re ready to arm yourself, check out 7 Tips to Prevent Impulse Buys. If you’ve already armed yourself, leave us a comment and share your tricks for avoiding retail industry tricks.

Karla Bowsher runs our deals page and covers consumer, retail, and health issues. If you have a comment, suggestion, or question, leave a comment or contact her at karla@moneytalksnews.com.

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