J C Penney Should Have Learned About Anchoring Effects

The NY Times describes the failed pricing strategy of J C Penney, which had opted out of its previous system of coupons offering huge discounts in favor of “everyday low prices.” Although the move made sense from an operational standpoint –

For sellers, setting and holding one price makes plain, economic sense. “You’re always going in and changing prices and that takes manual labor,” said Ronald Friedman, retail practice leader at the accounting firm Marcum. “Also, if you have one price, you have a better feel for expected margins and gross profits, you can manage to your budgets a lot better, and it’s more efficient.”

– it ultimately flopped. Why did the strategy backfire? Consumers like a deal. They like the feeling of seeing one price, then paying a lower one. Even though it may *seem* like there shouldn’t be, there can be a big difference between paying $10 for a shirt and buying the same shirt, marked at $20, for $10 with a 50% off coupon. In other words, the reference point (the initial price consumers see) matters.

The phenomenon is known as anchoring, since the initial reference point serves to influence (or “anchor”) the consumer’s determination of the item’s value. Some sellers can use this information to falsely lead consumers to think an item has more value than it does by increasing the reference point (“This shirt used to be marked at $200, but we’ll give you 95% off!”). Nevertheless, the psychology of consumers should play an important role in pricing strategy – and by failing to account for this, J C Penney’s bottom line suffered.

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