JC Penney, game theory, and price shrouding

JC Penney now has everyday low prices that replace having everything on sale all the time, with occasional special sales (usually on Saturdays) with rock bottom prices. Some items go on sale, and the sale lasts the entire month (instead of the week).

The motivation: three-quarters of everything sold at JC Penney occurs when the products are marked at a ~50% discount from list price.  Customers wait until the really good sales and then stock up: Items are marked down 30% of the time for 6.5 days a week and occasionally go on sale for ~50% off.  Most items are sold on the days with 50% markdowns. JC Penney’s new approach is to keep everything at almost-rock-bottom prices, thus encouraging shoppers to stop by every day of the week. The prices are quite low, but not quite as low as they used to be. Consumers have to weigh being able to wait to buy something at a time that is less convenient with saving a small value on price.

At first, I thought that this was a nice game that hasn’t played out yet. The idea is that if every other department store offers big weekend sales, then JC Penney might lose out on the customers who are at Kohl’s and Macy’s (there is only so much shopping you can do on Saturday mornings). Moreover, JC Penney is missing out on the customers who might have wanted to pop in on Thursday but didn’t because the prices weren’t low enough. JC Penney is finding its niche in the market that will eventually win over consumers, since they have no department store competitors. A similar game theory analysis has done been done on Starbucks’s approach to investing in training rather than advertising (see this blog or this blog for example). By distinguishing themselves from their competitors, Starbucks can corner a certain segment of the market.

I love the new JC Penney. But when I am there, the store is basically empty. JC Penney sales have slumped. Some speculate that JC Penney needs to educate the consumer so that customers figure out how to play the game. They have recently started to do this in the ads, showing that the new price is lower than the old price on sale. And by the way, the new ads are beautiful– even my kids like to pore over them.

A new article on the Red Tape blog on MSNBC suggests that JC Penney is doomed regardless. People don’t want cheap everyday prices, they want mysterious, shrouded prices in deceptive circulars that promise uber-low prices and that ultimately trick consumers. The article mentioned anchoring: Consumers love to buy a $20 item that is 50% off. They do not like a regular priced $10 item. We have been trained to look for discounts, anchoring on the high, undiscounted price.

If you think about it, shrouded price tags are everywhere. The hotel website might say “$99 a night” but you know the bill will be more like $120 or $130…

Consumers complain about this constantly. That’s the basis of the Red Tape Chronicles in fact. At its best, the maddening mixture of coupons, rebates, sales and fine print fees can feel like a game. At worst, it’s being cheated. You’d think shoppers would love a chance to buy from a store that doesn’t play these games, the way car buyers (allegedly) like shopping at no-haggle auto dealerships.

They don’t, says Gabaix, and Penney should have known better. “I think it was an ill-advised move,” he said.

All this price manipulation is really an information war, he says. Shoppers hunt for the tricks that let them save money. Stores hide booby traps that let them take money. It’s a bad system, one I’ve labeled “Gotcha Capitalism.” But it is the system we have now.

And it’s simply impossible, Gabaix argues, to be the one company that attempts to bridge this information gap.  If a firm tries to educate consumers on tricks and traps, and tries to offer an honest product, a funny thing happens: Consumers say, “Thank you for the tips,” and go back to the tricky companies, where they exploit the new knowledge to get cheaper prices, leaving the “honest” firm in the dust.

“Once you educate consumers on the right way to shop, they will seek out the lowest cost store, and that will be the one with the shrouded prices,” he said. “Once they are savvier consumers, you make less money from them.”

Gabaix calls this the “curse of debiasing.” And it leads to this depressing conclusion: “Shrouding is the more profitable strategy.”

The above article seems accurate to me. I no longer buy the brands that are not exclusive to JC Penney, because I can wait for a sale at Kohls, for example, and get them for cheaper. JC Penney also didn’t do a good job at comparing the new prices to the old. The ads only contain the new everyday prices without a comparison to what they used to be. I have been conditioned to look for a % off, so the new, low prices don’t seem “low” to me, even when they are a great deal.

Despite this, I like the new store. My Saturdays are busy with the kids. JC Penney is near my house and on my route home from work. It is easy to shop at other times, and I prefer to shop when it is not so crowded. Yes, I could get something at epsilon cheaper, but I used to have to make multiple trips to the store to get the “best” prices. The prices are low enough that the extra epsilon on price is well worth the time savings.

Do you think JC Penney can overcome the odds and succeed?

One response to “JC Penney, game theory, and price shrouding

  • Sue VanHattum

    I think Gabaix is wrong. Doesn’t Trader Joe’s do this? They advertise that their prices are always as low as they can find through high volume buying, and they don’t have one-day sales. People love Trader Joe’s, and I have the impression they’re doing very well. I guess JC Penney needs to figure out how to be the Trader Joe’s of department stores.

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