May 30, 2012

Penney Pinching

Most of us don’t like price gimmicks. But when J.C. Penney decided to do away with lots of big sales in favor of everyday low prices—well, it turns out that customers preferred those gimmicks after all. Revenue dropped 20% for the quarter.

An item in The Futures Five, a bi-weekly newsletter from the consulting firm The Futures Company, says that on the face of it J.C. Penney’s move made sense. “Why, after all, wouldn’t customers appreciate the more straightforward, less manipulative approach the retailer has embraced?” it asks. “Yet by eliminating sales and markdowns, it appears J.C. Penney may have also inadvertently removed one of the biggest, if underestimated, aspects of shopping: the thrill of the chase.”

Whatever the reasons for the lukewarm reception by the public, J.C. Penney has only itself to blame. That would be the view of Peter Drucker, at least. “The first rule is that there are no irrational customers,” Drucker wrote in Management: Tasks, Responsibilities, Practices. “Customers almost without exception behave rationally in terms of their own realities and their own situation.”

To speak of an irrational customer is as silly as speaking of an “‘irrational infection’ when a certain strain of bacteria refuses to yield to an antibiotic,” Drucker added in the Age of Discontinuity. “The fact is that something is happening that is not in accord with what the theory has predicted. The theory needs to be changed.”

Drucker advised that, when customers act in an unexpected manner, a business should ask the following: “What in the customer’s behavior appears to me totally irrational? And what therefore is it in his reality that I fail to see?” Asking such questions forces executives “to take action according to the logic of the market rather than according to the logic of the supplier.”  Either you must adapt to a customer’s behavior, or else you must “embark on the more difficult job of changing the customer’s habits and vision.”

What do you think: Did J.C. Penney misread the customer’s desire for “the thrill of the chase,” or is something else going on?

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