Poor Pricing Strategy – Example and Definition

Pricing is a critical aspect of business strategy, impacting profitability, competitiveness, and brand perception. While a well-thought-out pricing strategy can drive success, a poor pricing strategy can lead to financial loss, decreased customer trust, and even business failure. In this article, we will define what a poor pricing strategy is and provide a poor pricing strategy example to illustrate its impact on business performance.

Understanding Poor Pricing Strategy

A poor pricing strategy occurs when a company sets a product or service price that does not align with market conditions, customer expectations, or business objectives. This misalignment may result from a lack of research, incorrect assumptions, or failure to adapt to changing market dynamics.

Characteristics of Poor Pricing Strategy

1. Lack of Market Research: Prices are set without understanding customer needs or competitor prices.
2. Inconsistent Pricing: Prices vary without a clear rationale, causing customer confusion.
3. Overpricing or Underpricing: Setting prices too high or too low, leading to reduced sales or profit margins.
4. Ignoring Cost Structure: Failing to consider production and operational costs when setting prices.
5. Static Pricing: Not adjusting prices according to market trends or economic shifts.
6. Short-Term Focus: Prioritizing quick gains over long-term profitability.

Poor Pricing Strategy Example: J.C. Penney’s “Fair and Square” Pricing

Background

J.C. Penney, a well-known American department store chain, implemented a significant pricing strategy shift in 2012 under the leadership of then-CEO Ron Johnson. The company abandoned its long-standing strategy of using discounts and coupons, replacing it with a “Fair and Square” pricing model. This model aimed to offer everyday low prices instead of periodic discounts.

The Strategy

The new strategy eliminated sales promotions and established fixed, non-negotiable prices for products. The intention was to simplify the shopping experience and present more straightforward pricing.

Why It Was a Poor Pricing Strategy

Despite the intention to create transparency and fairness, the strategy failed for several reasons:

1. Ignoring Customer Expectations

J.C. Penney’s customer base was accustomed to frequent discounts and perceived value through promotions. By eliminating these incentives, the brand failed to meet customer expectations, resulting in a sharp decline in sales.

2. Misjudging Market Position

J.C. Penney aimed to mimic the pricing strategy of brands like Apple, where Ron Johnson had previously worked. However, unlike Apple’s premium and innovative products, J.C. Penney’s offerings were perceived as mid-range, and customers expected discounts.

3. Lack of Communication

The company failed to clearly communicate the reason behind the pricing change, leaving loyal customers confused and frustrated. Without proper context, the new strategy seemed abrupt and unappealing.

4. Lack of Flexibility

By sticking rigidly to fixed prices, the company could not adapt to competitors who continued to use sales and discounts. This inflexible approach alienated bargain-hunting customers.

5. Failure to Test the Concept

The change was implemented nationwide without adequate testing in selected markets. As a result, the company did not foresee the negative response from its core audience.

Consequences of the Poor Pricing Strategy

The results of J.C. Penney’s poor pricing strategy example were devastating:

• Decline in Sales: The company reported a 25% drop in revenue in the first year.
• Loss of Customers: Longtime customers abandoned the brand, feeling disconnected from the new pricing approach.
• Leadership Changes: The failure led to the resignation of Ron Johnson as CEO.
• Financial Loss: The company faced significant financial strain, forcing it to revert to its original pricing model within a year.

Lessons Learned from the Poor Pricing Strategy Example

The J.C. Penney poor pricing strategy example highlights several critical lessons:

1. Understand Your Customer

Implementing a new pricing strategy without considering the existing customer base can lead to failure. Companies must research customer preferences and buying behaviors before making radical changes.

2. Test Before Implementing

Launching a new strategy without pilot testing is risky. Testing in selected markets allows for adjustments based on customer feedback.

3. Communicate Clearly

When changing a fundamental aspect of your business, clear communication is essential. Customers need to understand the reasons behind changes to feel connected to the brand.

4. Avoid Drastic Shifts

Switching from a promotional pricing strategy to fixed pricing overnight was too drastic. Gradual changes are easier for customers to accept.

5. Align Strategy with Brand Identity

Trying to replicate a pricing strategy from another industry (like Apple’s premium pricing) without considering brand perception can backfire. J.C. Penney’s pricing did not align with its established identity as a discount-driven department store.

Other Poor Pricing Strategy Examples

Apart from J.C. Penney, other companies have faced similar challenges:

Coca-Cola’s Vending Machine Pricing

Coca-Cola experimented with vending machines that raised prices on hot days. This dynamic pricing strategy led to customer outrage as it seemed exploitative, and the plan was quickly abandoned.

Netflix Price Hike in 2011

Netflix announced a sudden 60% price increase for its DVD and streaming services, leading to subscriber backlash and a drop in stock prices. The company later admitted that it had poorly communicated the changes.

How to Avoid Poor Pricing Strategies

Businesses can mitigate the risks of poor pricing by adopting the following practices:

1. Conduct Thorough Market Research

Understand customer preferences, willingness to pay, and competitor pricing before setting or changing prices.

2. Implement A/B Testing

Test new pricing strategies in limited areas to gauge customer reactions and fine-tune the approach.

3. Monitor Competitor Actions

Keep track of competitors’ pricing changes to maintain competitiveness while differentiating your brand value.

4. Use Dynamic Pricing Cautiously

While dynamic pricing can optimize revenue, it should not come at the expense of customer trust. Transparent communication is key.

5. Adapt to Feedback

Stay flexible and be willing to adjust your pricing strategy based on customer feedback and market conditions.

Conclusion

A poor pricing strategy can have far-reaching consequences, from declining revenue to damaging brand loyalty. The poor pricing strategy example of J.C. Penney illustrates the dangers of making drastic changes without customer insight and communication. Businesses must carefully consider market conditions, customer expectations, and brand identity when formulating pricing strategies. By learning from past failures and adopting a customer-centric approach, companies can create effective and sustainable pricing strategies.