JCPenney hired ex-Apple guru Ron Johnson with great expectations that the guy behind the hip and amazingly successful Apple stores would be able to work similar magic at the old line retailer. His strategy was to simply break the customer habit of needing a sale and instead impress them with â€œeveryday pricing.â€ But after several quarters of precipitous drops in revenue it seems that customers are not so ready to give up the sale habit.
This situation reminds me of a conversation I had with a client while ago. He had an opportunity to sell a warehouse full of parts from a company that had gone out of business. The parts were a good fit for his EBay store, and he thought this would be a great opportunity to pick up some cash. His main question to me was how he should structure the deal. Should he offer to buy the parts outright at a lower price, or should he make less money and lower his risk by taking a commission off of each part sold?
I suggested that the more important question was "At what price he was going to offer the parts?" There is nothing to split until there is a sale. His answer, after some discussion, was to offer the parts at 50% off. He would be able to make a great margin, and customers would get a great price. They were new-in-the-box, and the defunct company was well known in the industry. His argued customers couldnâ€™t find this price anywhere else, or ever again.
Whatâ€™s the connection between the two situations? I believe that both cases are examples of two very accomplished people confusing what they want with what customers want.
In both cases it seems possible to me that the strategy was driven more by what the company needed rather than what the customers wanted. In JCPennyâ€™s case the rationalization is that customers really donâ€™t want sales as much as a fair priceâ€”wrong. In fact, it looks like Pennys is finding out that part of the fun of shopping is scoring a sale. It is much more fun to brag about a good deal versus everyday pricing. Customers want some fun with their good price.
In my clientâ€™s case, his rational was that customers will recognize that 50% off is a great deal. With the parts coming from a company known for its quality, the lack of warranty was not a big dealâ€”this is wrong. My argument to him was that liquidation is a special situation. The very word creates a different selling contextâ€”periodâ€”no matter what you are selling. I argued that a liquidation of anything should be priced around 70% off.
He didnâ€™t agree with me, but he agreed that he would prove me wrong by running a test with a small sampling of parts before he made a bigger commitment. The parts didnâ€™t sell at 50% off and they didnâ€™t sell all that well at 70% off. The good news is that because of the test my client did not end up with his warehouse full of parts.
The lesson: It is dangerously tempting to rationalize that your customers want the same thing you do. I donâ€™t know any way to prevent it but there are two easy steps you can take to minimize the damage.
1. Clearly articulate why the thing customers want to do what you want them to do.
2. Find a way to test your assumptions, you could be wrong.