Susan Thompkins is somebody’s Aunt Susan, and everyone has a version of someone like Aunt Susan. Aunt Susan is a genuinely happy and loving woman, who also buys gifts for her nephews and nieces whenever she shops for herself and her kids. Aunt Susan loves shopping at JCPenney. She’s been shopping there since she was a child, going with her parents and grandparents, helping them spot bargains. There were always so many great deals to be found. It was a fun game, running around, looking for the highest number next to the percent symbol, proud of spotting the secret stash.
In recent years, Aunt Susan would drag along her brother’s kids, showing them ugly sweaters and mismatched outfits that they just “couldn’t pass up because they’re such great deals!” While the kids didn’t love it, she did. Getting the great bargains at JCPenney was still a big thrill for Aunt Susan.
Then, one day, Ron Johnson, JCPenney’s new CEO, got rid of all of the deals. He instituted what he called “fair and square” pricing across the board. No more sales, bargains, coupons, or discounts.
Suddenly Susan was sad. Then she was angry. Then she stopped going to JCPenney entirely. She even formed an online group with her friends called “I hate Ron Johnson.” She wasn’t alone. Many customers left JCPenney. It was a bad time for the company. It was a bad time for Susan. It was a bad time for Ron Johnson. It was a bad time for the ugly sweaters, too: They couldn’t buy themselves. The only ones having a good time? Susan’s nephews.
A year later, Aunt Susan heard discounts had returned to JCPenney. Cautiously, with her guard up, she returned. She hunted through a rack of pantsuits, examined some scarves, and checked out a paperweight display. And she looked at the prices. “20% off.” “Marked down.” “For sale.” She bought just a couple of things that first day, but since then, she’s returned to her old JCPenney self. She’s happy again. And that means more shopping trips, ugly sweaters, and awkward thank-yous from her loved ones. Hooray.
A JCPenney for Your Thoughts
In 2012, Ron Johnson, the new CEO of JCPenney, did scrap Penney’s traditional, and yes, slightly deceptive practice of marking products up and then marking them back down. In the decades before Johnson’s arrival, JCPenney always offered customers like Aunt Susan coupons, deals, and in-store discounts. These reduced Penney’s “regular prices,” which were artificially inflated, to appear to be “bargain deals,” but in fact after the discounts their prices were in line with prices everywhere else. In order to get to the final, retail price of an item, customers and the store would perform this Kabuki theater of raising prices at first and then lowering them in all kinds of creative ways, with different signs and percentages and sales and discounts. And they played this game over and over again.
Then Ron Johnson made the store’s prices “fair and square.” No more coupon cutting, bargain hunting, and sale gimmicks. Just the real price, roughly equal to those of its rivals and roughly equal to their previous “final” prices—after raising and discounting them. Johnson believed his new practice was clearer, more respectful, and less manipulative for his customers (and he was right, of course).
Ron Johnson’s JCPenney offered products at more honest prices and was rejected in favor of sales gimmicks.
Except that loyal customers like Aunt Susan hated it. They detested “fair and square.” They abandoned the chain, grumbling about feeling cheated, being misled and betrayed by the real and true cost, and not liking the honest, fair-and-square pricing. Within a year, JCPenney lost an amazing $985 million and Johnson was out of a job.
Almost immediately after his firing, the list price of most items at JCPenney rose by 60 percent or more. One side table that cost $150 rose to an “every day price” of $245. Not only were the regular prices higher, but there were more discount options: Instead of just a single dollar amount, the store offered “sale,” “original,” and “appraised at” prices. Of course, when we factor in the discounts available—by sale, or coupon, or special deal—the prices pretty much stayed the same. They just didn’t look that way. Now it looked like JCPenney was once again offering really great deals.
Ron Johnson’s JCPenney offered products at more honest prices and was rejected in favor of sales gimmicks. Aunt Susan still hates him. Think about that: JCPenney’s customers voted with their wallets and they elected to be manipulated. They wanted deals, bargains, and sales, even if it meant bringing back inflated regular prices—which is exactly what JCPenney eventually did.
JCPenney—and Ron Johnson—paid a high price for failing to understand the psychology of pricing. But the company ultimately learned that it could build a business based upon our inability to assess value rationally. Or, as H. L. Mencken once said, “No one ever went broke underestimating the intelligence of the American public.”
What’s Going On Here?
The story of Aunt Susan and JCPenney shows some of the many effects of relativity, one of the most powerful forces that make us assess value in ways that have little to do with actual value. At JCPenney, Aunt Susan assessed value based upon relative value, but relative to what? Relative to the original posted price. JCPenney helped her make the comparison by posting the discount as a percentage and adding notes like “sale” and “special” to help focus her attention on the amazing relative price they offered.
Which would you buy? A dress shirt priced at $60 or the very same dress shirt, priced at $100, but “On Sale! 40% off! Only $60!”?
It shouldn’t matter, right? A $60 shirt is a $60 shirt, no matter what language and graphics are on the price tag. Yes, but since relativity works on us at a very deep way, we don’t see these two in the same way, and if we were a regular like Aunt Susan, we would buy the on-sale shirt every time—and be outraged by the mere presence of the straight-up $60 one.
When it is hard to measure directly the value of something, we compare it to other things, like a competing product or other versions of the same product. When we compare items, we create relative values.
Is this behavior logical? No. Does it make sense once you understand relativity? Yes. Does it happen frequently? Yes. Did it cost an executive his job? Absolutely.
We often cannot measure the value of goods and services on their own. In a vacuum, how could we figure the cost of a house or a sandwich, medical care or an Albanian three-toed blork? The difficulty of figuring out how to value things correctly makes us seek alternative ways to measure value. That’s where relativity comes in.
When it is hard to measure directly the value of something, we compare it to other things, like a competing product or other versions of the same product. When we compare items, we create relative values. That doesn’t seem too problematic, right?
The problem isn’t with the concept of relativity itself, but with the way we apply it. If we compared everything to all other things, we would consider our opportunity costs and all would be well. But we don’t. We compare the item to only one other (sometimes two) . This is when relativity can fool us.
Sixty dollars is relatively cheap compared to $100, but remember opportunity costs? We should be comparing $60 to $0, or to all of the other things we could buy with $60. But we don’t. Not when, like Aunt Susan, we use relative value to compare the current price of an item to the amount it used to cost before the sale (or was said to cost) as a way to determine its value. This is how relativity confounds us.
JCPenney’s sale prices offered an important value cue to customers. Not just an important cue, but often the only cue. The sale price—and the savings JCPenney touted—provided customers context for how good a deal each purchase was.
JCPenney’s sale signs provided customers with context, and without context, how could we determine the value of a shirt? How could we know whether it’s worth $60 or not? We can’t. But compared to a $100 shirt, a $60 one sure seems like a great value, doesn’t it? Why, it’s almost like getting $40 for free! Let’s all buy one so our nephews can be mocked at school!
By eliminating the sales and “savings,” JCPenney removed an element that helped their customers feel that their decisions were the right ones. Just looking at a sale price next to a “regular” price gave them some indication that they were making a smart decision. But they weren’t.