J.C. Penney Pricing in 2012: Why Fair and Square Drove Shoppers Away

The room

The psychology: transaction utility

In 1985 Richard Thaler split the value of a purchase into two parts. Acquisition utility is what you get for what you pay: the worth of the shirt compared with its price. Transaction utility is the value of the deal itself, judged against a reference price, the price you expected or think is fair. A buyer who pays $20 for a shirt tagged $40 gets the same shirt as one who pays $20 for a shirt tagged $20, but only the first one gets a bargain. Thaler argued that suggested retail prices work as reference prices, and that goods whose quality is hard to judge, like furniture, are almost always on sale.

Fair and Square was designed around acquisition utility. Johnson said the new everyday prices were roughly what customers had paid before with a coupon. On that measure nothing was lost. But the old system had delivered something else as well: a high tag, a visible markdown and the small win of beating it. Remove the inflated tag and the sale sign, and the same shirt at the same price offers no transaction utility. To a shopper who reads value through the size of the discount, a fair price can look like a worse deal.

There was also an information problem. Most people cannot tell whether a given price for a cardigan is a good one. A sale sign and a crossed-out price answer that question for them. Johnson’s critique was that Penney’s reference prices had become meaningless, and with 590 promotions a year he had a point. But the solution removed reference prices entirely and left shoppers with nothing to compare against.

Why smart people fall for it

Three forces turned honest prices into a 25 percent fall in sales.

1. 1

   The deal is part of the product

   Shoppers valued the win of a markdown, not only the goods. A lower tag with no visible saving removed that win.

2. 2

   No anchor, no judgment of value

   Few customers know what clothing should cost. Without a former price or sale sign, they had nothing to measure a fair price against.

3. 3

   Habits trained over years

   Penney had taught shoppers to wait for the next event. Ending events did not end the habit, and customer traffic fell short.

Was J.C. Penney pricing really the main problem?

Fair and Square was not the only change of 2012. Johnson also brought in new brands, began building branded shops inside stores and shifted the look of the chain toward younger, more style-led shoppers. Several of those moves drew criticism of their own. So it is fair to ask whether pricing was the cause or simply the most visible part of a broader shock.

The record suggests pricing was central. Johnson himself singled it out. In July 2012 he said the pricing had been confusing, and in February 2013 that customers needed a reference price. The company’s own fixes were pricing fixes: two tiers instead of three, a price-match promise, and finally weekly sales and coupons. Barbara Kahn at Wharton said there was no question the pricing strategy was flawed, while describing the merchandising concept as creative.

There is also the question of design versus execution. Kahn argued that the first version was too confusing and that ads implying customers had been foolish to chase promotions did not help. Her colleague Stephen Hoch was blunter, saying the approach was obviously not going to work. Those are different diagnoses. One says a cleaner plan, better explained, might have worked. The other says everyday low pricing does not suit a mid-priced department store whose customers come for the hunt.

Either way, the scale of the decline points to the same lesson. A strategy that changed how millions of people judged value was launched in every store at once. Whatever share of the fall belongs to pricing, the company had no smaller test to tell it, and by the time the evidence arrived it covered the whole chain.

What does the research say about sales and reference prices?

Thaler’s beer-on-the-beach question captures the core idea. The beer is identical and so is the beach. Only the seller changes, and with it the price people think is fair. That is transaction utility at work: people care not only about what they get but about whether the price feels like a good deal compared with what they expected.

For apparel the expected price is fuzzy, which makes the seller’s cues powerful. Eric Anderson and Duncan Simester studied what happens when stores put sale signs on products. In clothing catalog data, a field test and grocery data, the signs increased demand, sometimes by more than half. Their explanation is that customers who do not know market prices use the signs as information about whether to buy now.

The same research supports part of Johnson’s diagnosis. Sale signs became less effective as more products carried them, because customers stopped believing them. Total sales in a category were highest when some items, not all, had signs. A store where everything is always on sale has devalued its own signal. On that reading, Penney’s 590 promotions were a real problem.

But the evidence points toward rationing sale cues, not abolishing them. Johnson was right that the signal had been overused. Fair and Square removed it altogether and gave shoppers neither a credible markdown nor any other reference to judge the new prices against. The research suggests the useful middle path was fewer, more credible signals.

How would a modern team decide?

A modern team would start by separating two questions: are the new prices good value, and will customers recognize them as good value? The first is arithmetic. The second is psychology, and it needs evidence from real shoppers rather than internal conviction. Penney had a strong answer to the first question and almost no data on the second.

It would then test the change somewhere it could fail cheaply. A handful of comparable markets on the new pricing, with matched markets on the old system, would have shown within a few months what happened to traffic, conversion and basket size. The cost of a pilot is delay and a less dramatic launch. The cost of skipping it, at Penney, was a quarter of the company’s sales.

It would also design the reference price instead of deleting it. Options include showing a genuine former price, comparing with a named competitor, explaining how the everyday price relates to what shoppers used to pay after coupons, or keeping a small number of credible events. Each gives customers something to judge value against while the inflated tag disappears.

Finally, it would agree in advance what result would trigger a change of course. Penney did adjust, but in steps over a year: two tiers in August, then weekly sales and coupons in February. A clear threshold, set before launch, would have forced the bigger decision sooner and with less damage.

The manager's playbook

1. Map what the old price gave customersList every benefit of the current pricing, including the feeling of a deal, not just the money saved.
2. Keep a credible reference priceIf you remove inflated tags, give shoppers a genuine former price, competitor price or other honest anchor.
3. Pilot in matched markets firstRun the new pricing in a few stores or regions against similar control locations and track traffic as well as margin.
4. Ration promotions instead of ending themCut the number of events until each one is believable, and watch whether demand per event rises.
5. Set reversal triggers before launchAgree which sales or traffic thresholds will force a rethink, so the call is not made under pressure months later.

Questions people ask