Being innovative in pricing takes some good old-fashioned marketing work. You not only have to understand the value that you are delivering, but you also have to understand the personas that make up your customer base. Pricing Gurus has been tracking two companies that made significant innovative changes in their pricing structure: J.C. Penney and LinkedIn. Let’s take a look at how one company has done very well with their new pricing, and how one may be teetering on the edge of extinction because of it.
JC Penney
In November of 2011, JC Penney hired Ron Johnson to take on the CEO role at JC Penney. Johnson had previously worked as head of Apple’s retail strategy and had successfully opened over 200 Apple stores. (Upon leaving Apple for JC Penney, Steve Jobs asked Johnson “are you serious?”) Before working at Apple, Johnson had served as VP of Merchandising for Target stores.
Johnson was quoted in an AP interview (January 30th, 2012) saying that “Pricing is actually a pretty simple and straightforward thing. Customers will not pay literally a penny more than the true value of the product.” At Pricing Gurus, we find humor in this quote because while “not paying more than true value” is simple in concept, determining the true value and what value customers want is hard.
On February 1st, 2012, Ron Johnson announced his plans to eliminate many of the promotions that JC Penney was known for, and move towards a philosophy of everyday low pricing. Johnson’s plan was to tell customers that they didn’t have to spend time anymore clipping coupons or waiting for sales to happen. Instead the store would offer fair prices on its merchandise every day.
It turns out the JC Penney customers liked clipping coupons and crowding in for sales. They valued the experience. They didn’t like the new pricing or the new store layouts. In an NPR interview on March 1st, Carol Vickery who shopped at the JC Penney in Tallahassee, Fla. said: “I come home and I cry over it, and my husband’s looking at me, like, ‘What’s wrong?’ I said, ‘Penney’s doesn’t have sales anymore. I need my store back!’ ”
The result of this has been a financial disaster for JCPenney. In Q4 of 2012, they announced a same store sales drop of 31.7% and in Q1 of 2013 sales continue to fall. Their stock price has slid from $40 in March of 2012 to $15 on March 6th 2103. As a comparison, Macy’s stock price is slightly higher than it was a year ago and same store sales were up 3.7% for the year.JC Penney
In November of 2011, JC Penney hired Ron Johnson to take on the CEO role at JC Penney. Johnson had previously worked as head of Apple’s retail strategy and had successfully opened over 200 Apple stores. (Upon leaving Apple for JC Penney, Steve Jobs asked Johnson “are you serious?”) Before working at Apple, Johnson had served as VP of Merchandising for Target stores.
Johnson was quoted in an AP interview (January 30th, 2012) saying that “Pricing is actually a pretty simple and straightforward thing. Customers will not pay literally a penny more than the true value of the product.” At Pricing Gurus, we find humor in this quote because while “not paying more than true value” is simple in concept, determining the true value and what value customers want is hard.
On February 1st, 2012, Ron Johnson announced his plans to eliminate many of the promotions that JC Penney was known for, and go towards a philosophy of everyday low pricing. Johnson’s plan was to tell customers that they didn’t have to spend time anymore clipping coupons or waiting for sales to happen. Instead the store would offer fair prices on its merchandise every day.
It turns out the JCPenney customers liked clipping coupons and crowding in for sales. They valued the experience. They didn’t like the new pricing or the new store layouts. In an NPR interview on March 1st, Carol Vickery who shopped at the JC Penney in Tallahassee, Fla. said: “I come home and I cry over it, and my husband’s looking at me, like, ‘What’s wrong?’ I said, ‘Penney’s doesn’t have sales anymore. I need my store back!’ ”
The result of this has been a financial disaster for JCPenney. In Q4 of 2012, they announced a same store sales drop of 31.7% and in Q1 of 2013 sales continue to fall. Their stock price has slid from $40 in March of 2012 to $15 on March 6th 2103. As a comparison, Macy’s stock price is slightly higher than it was a year ago and same store sales were up 3.7% for the year.
On a positive note, let’s look at the new pricing structure from LinkedIn. If you have a LinkedIn account, you’ve undoubtedly seen many of the changes to the site – even if you are a free subscriber. Some of the changes have been beneficial to all, while many changes have made features accessible only to those that invest in a paid subscription. LinkedIn now offers twelve different paid account types distributed among four market segments: Business, Talent, Job Seeker and Sales.
As a long time user of LinkedIn, I appreciate the value that it delivers to me. It has not only become my extended list of “contacts,” but I have also have gotten business opportunities through my free LinkedIn subscription. As professionals see the value in these extended offerings, paid subscriptions will continue to grow.
In an interesting twist, LinkedIn has gained value by taking away from one of its core set of users – recruiters. According to Michael Overall of RecruitLoop, “In the good old days, the biggest perceived asset of recruiters was their “little black books” or proprietary databases. Now everyone has access to the LinkedIn database and companies are learning that they can bypass recruiting “agencies” by directly accessing LinkedIn products themselves.
As a result of this offered value, as of March 4th 2013, LinkedIn share traded at $178 which is significantly up from its May 2011 IPO price of $45 per share. Revenues in 2012 were 86% higher than in 2011. By comparison Monster Worldwide (Monster.com) share price has dropped over 37% in the past year.
LinkedIn has certainly shown that it is possible to be successful with a Freemium model. Pricing Gurus feels that LinkedIn has been successful in delivering the value to customers who want paid subscriptions. This tends to quiet the grumblings of those who “used to get it for free.” Customers want LinkedIn to stay in business and provide the services they are currently getting.
Observations
Unlike Ron Johnson, Pricing Gurus feels that getting pricing right can be complex – and must be delivered in a way that customers want. JCPenney made sweeping changes to the whole organization where LinkedIn was very strategic in offering specific value to its four distinct target markets.
[Post contributed by Dan DeVries, Wild Horse Strategies]
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