I
know you read the headlines in 2012 about Ron Johnson, the Apple vice
president, who was hired away from Apple to become the president of J.C. Penney
(“Penney”). By the spring of 2013, he was gone — fired by the Penney board of directors.
I wanted to find out why, because I was sure there were some good business
lessons to be learned. As it turns out, there is much to be learned from what
Johnson did and did not do at Penney.
When
Johnson arrived at Penney, he found a culture of sales, markdowns and coupons —
exactly the opposite of Apple’s culture of high prices and a very high level of
service to go with it. In Penney’s culture, I’m sure Johnson saw that constantly
changing prices in the stores took lots of manual labor. At Apple, there were
no surprises in margins and gross profit,
managing to budgets was easier, and there was more efficiency throughout the
enterprise. Inventories were stable at
Apple, and there were no whiplash effects of selling thousands of an item one week
and none the next week because of discounting and coupons.
The
interesting fact was that Penney customers were actually not paying less in the
old culture. Penney just kept raising prices and then discounted those prices
during promotions. The average markdown was 50 percent. Low consumer prices were
really a mirage. But Penney customers were conditioned to wait for deals and sales,
partially because they did not have a good sense of what an item was really
worth.
Alexander
Chernev, a professor at the Kellogg School of Management at Northwestern
University, summed up the faults in Johnson’s strategy this way: “By going to everyday
low and ‘fair’ pricing with a single non-discountable price, Johnson assumed
consumers have some context for how much items should cost. But they don’t.
Penney might say it’s a fair price, but why should consumers trust Penney?”
Chernev asked. “At the end of the day, people don’t want a fair price. They
want a great deal. Consumers infer that they get a great deal based on the reference
point provided by the higher, presale price. Social scientists refer to this
idea as anchoring, and it applies to all sorts of consumer behavior and expectations.
Without that anchor, consumers have trouble determining whether the store is
actually giving them a good price.”
A
Journal of Retailing study says, “Even the words a retailer uses in its
marketing can affect how a customer judges a deal — ‘sale’ or ‘special’ leads
people to think the item has a high value, but a straight markdown leads them
to think it’s a cheaper item.”
In
the old Penney culture, limited-time sales lured customers into the stores, which
was very important because Penney doesn’t have a differentiated, high-value product
like Apple. Also, coupons were effective in drawing in a broader consumer base
— one shopper to buy at a high price, and a more price-sensitive shopper to buy
the same item at a lower price.
Which
retailers have been able to make everyday low pricing successful? Those that
take narrow profit margins like Costco and Wal-Mart. Costco almost never runs
sales and doesn’t adjust prices much, but it depends a great deal on annual
membership fees for profit. Wal-Mart makes up for low margins with huge volumes
of customers that come to its stores. But there was no such clarity at Penney.
Penney told its customers to expect low prices — but not the lowest prices.
Penney could not communicate exactly how much its shoppers were saving with
everyday low pricing, and regular Penney shoppers became confused and stayed
away.
Now,
we’re reading that Penney employee layoffs have affected employee morale at
Penney. Will good customer service be the next thing to go away at Penney?
Harvey
Mackay reminds us that one of the most important things employees can remember
when they come to work every day is “that their primary job is to provide incredible
customer service.” That’s the culture you want in your business.
Mackay
goes on to say, “Perhaps the simplest way of creating a service culture is a
variation of the golden rule: Treat your customers as you wish to be
treated. Make your customers excited
that you’re in business. Make them grateful that they have the opportunity to
buy your services and products. Make them feel like they are your most important
client. Make your service so outstanding that they wouldn’t even think of doing
business with anyone else. And then find a way to make your service even better!
Remember: Customer service is not a department, it’s everyone’s job.”
