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← Commerce courseCOMMERCE FROM ZERO · MODULE 17B · 8 min READ · FULL COURSE

Pricing and Promotion

The Number on the Tag

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Labels: [Sourced] checked against a source listed at the end. [General] standard industry knowledge. [Our view] opinion, labelled as such. [Illustrative] made-up numbers to teach an idea.

1. The story: JCPenney's "Fair and Square"

On January 25, 2012, J.C. Penney CEO Ron Johnson, who had come from Apple and earlier worked at Target, unveiled a plan to make the chain "America's favorite store." Beginning February 1, "Fair and Square" pricing replaced a relentless series of sales, coupons and rebates with three kinds of price (everyday, month-long values, and best prices on the first and third Fridays) and 12 promotional events a year. [Sourced: J.C. Penney press release, Jan 25, 2012; Bloomberg, Jan 31 2012] By mid-2012, Harvard Business School's case says, he was reconsidering the changes. [Sourced: HBS case, Ofek and Avery] On April 8, 2013, after about 17 months, the board ousted Johnson and brought back former CEO Myron Ullman; the stock dropped 12% the day of the announcement. JCPenney's own annual report says total sales for fiscal 2012 fell 24.8% to $12.985 billion, with comparable-store sales down 25.2% (the total includes a 53rd week; comparable-store sales exclude it). [Sourced: Wharton Knowledge; NYT, Apr 9 2013; JCPenney FY2012 annual report] Wharton faculty quoted in the piece blamed a confusing pricing strategy, a lack of testing, and waffling on the "no sales" policy, and said the company had gone back to coupons. [Sourced: Wharton Knowledge; opinions of the faculty quoted] The lesson: prices are also a promise about how a store behaves, and shoppers had learned to expect sales. [Our view]

2. The one idea

Price does two jobs: it earns money and tells the shopper what you are. [General]

3. The kitchen-table version

A yard sale. Price too high, nothing sells. Price too low, you lose money. Put a "50% off" sign and people come, but then they expect it next time.

4. Three pricing styles [General]

  • EDLP (every day low price): steady low prices, few promotions.
  • High-low: higher regular prices with frequent deep promotions.
  • Dynamic: prices change by time, stock or demand; electronic shelf labels make updates fast. Adoption of ESLs by Walmart and Kroger has triggered regulatory scrutiny at federal and state levels. [Sourced: SSRN abstract]

5. Worked examples [Illustrative, computed by script]

(a) EDLP vs high-low for our bottle (cost $5).

  • High-low: 60% of weeks at $12 selling 100 a week, 40% of weeks at $9 selling 200 a week. Revenue per week average = $1,440, units 140, profit = $740.
  • EDLP: always $10.50 selling 130 a week. Revenue $1,365, profit $715. Close. The winner depends on the numbers, and on costs not shown (staffing, ad cost, trust). [Our view]

(b) The price-cut trap. Elasticity of -1.5: a 10% price cut ($12 to $10.80) lifts units 15%. Baseline 100 units: profit = 100 x $7 = $700. After: 115 x $5.80 = $667. You sold more and made less. Rule: a cut needs enough lift to cover the margin you give up. Here the margin falls from $7 to $5.80 (17% less), so you need more than 17% more units to break even. [Our view]

6. Promotion

Promotions pull sales forward, can train shoppers to wait, and strain supply chains (Modules 4, 5). Plan stock for the peak and the dip afterward. [General]

7. Markdowns

Clearing stock before it loses value. Walmart deployed a multiobjective markdown system that aimed to clear excess inventory by a set date while improving revenue. [Sourced: Interfaces/INFORMS abstract] Perishable markdown research studies pricing as items near expiry. [Sourced: SSRN abstract]

8. Where AI fits

Price recommendations from elasticity learned per item and store; markdown timing; promotion planning; watchdog for competitor prices. [General] Forward thread: shopper-side agents compare prices instantly, which may compress pricing power (Module 21). [Our view]

9. Exercise

Pick any product. Would a 10% price cut pay off if you assume its elasticity is -1? -2? Compute using the example.

10. Quiz

  1. EDLP vs high-low? Steady low vs frequent promotions off a higher price.
  2. Why can a price cut lose money? Margin loss may exceed volume gain.
  3. Name a risk of promotions. Pulls demand forward; trains waiting; stresses supply.

Sources

CURIOUS? TEST THE CLUES

Curiosity check

Pick an answer and see why. No scores, no pressure. All shop examples are invented practice scenarios.

01 What is the difference between EDLP and high-low pricing?
02 Why can a price cut lose money?