Can You Outsmart Your Customers on Pricing? Should You?

A New York Times spotlight on pricing tells you all you need to know regarding consumer savvy in today’s marketplace:

An item that cost Penney’s $10 in 2002 was typically marked up to $28. By 2011, a $10 item had been marked up to $40. But the price the customer actually paid for the $10 item increased only 5 cents during that period — to $15.95, from $15.90.

Thanks to the increased acceptance of e-tailers and the rise of online shopping search engines, consumers have leveled the playing field when it comes to pricing. They not only have a better sense of what items should cost but also have the leverage to play retailers against each other. This combination of knowledge and opportunity limits the ability to mark goods up, granting consumers significant control over the pricing game.

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The rise of mobile technology, meanwhile, has made it almost insane for customers not to take advantage of their pricing leverage. By arming customers with applications that allow them to scan a barcode to determine how that product is priced at competitive local and online retailers, mobile technology is literally begging customers not to make silly, uninformed decisions when it comes to product cost.

Interesting, however, is the fact that customers remain attracted to deep discounts, coupons and pricing promotions. Even though they have a clearer sense of the product’s true worth and thus should be able to make an objective judgment about whether or not a deal is fair, they still seek—and, in fact, expect—heavy "discounts" on the goods they purchase.

The Times piece discusses the challenges JC Penney has faced in establishing a new pricing structure, which debuts goods at a lower markup and then gradually introduces longer-term "specials" before ultimately putting the goods on clearance. Stein Mart, Urban Outfitters and American Eagle are also committing themselves to fairer, more transparent pricing.

While that concept should speak to today’s savvy customer—an individual that isn’t going to pay "full price" for department store merchandise but expects to pay a premium on newer goods—actual customer sentiment reflects confusion, at least in some cases (one can argue that "Wal-Mart" has successfully launched a model of offering consistently low prices that are competitive even without steep discounting).

Customers, the article explains, view discount-hunting as a sport. They aggressively seek coupons and massive percent-off discounts, and are therefore less inclined to react excitedly to lower base pricing, even if the actual number on the price tag is identical.

When a retailer like Jos A Bank runs a "buy one suit, get two free" promotion, it is not necessarily offering much in the way of a discount over its normal pricing, which typically includes a steep reduction from the "list price" for the clothing. Yet consider how much more attractive that promotion sounds.

Today’s customers might have a better sense of what things should cost—and far more avenues for confirming that sense—but they are still human, and they’re still attracted to the notion of "beating the system."

They are also still impulsive and can still be swayed by strategies that catch their eyes.

A goal for many retailers, it would seem, would be to offer the discounts and coupons that entice customers but base them against a fairer, more realistic pricing model. If a customer gets a "buy one get one half off" promotion on a good that is priced in accordance with what the customer would expect to pay, it will score on both grounds.

And through optimization, it is likely that the strategy will still be profitable for the organization, if not more profitable than the alternative of letting the original product dip to closeout levels.

How are you pricing given the mindset of the 2012 customer? Do you still follow a GNC model of listing goods at massive "MSRPs" but then offering monthly discounts that bring prices into the same ranges offered by competitive online retailers? Or, are you trying to be more like the new JC Penney and starting with more realistic prices that do not theoretically require additional discounts to reach attractive levels for customers?

Update: If you are looking at the JC Penney model, you might want to reconsider. Morgan Stanley analyst Michelle Clark revealed that customers are thoroughly confused and disappointed by JCP's new pricing strategy, which gives the appearance that customers are paying more for products. She writes:

"Consumers’ perception of JCP’s new pricing regime is worse than we (and the market) thought. Looking at shoppers who have been to JCP since 2/1 (i.e. since the intro of new pricing), more cited higher prices (rather than lower) at the dept. store. In fact, only 16% of shoppers associated ‘Best Prices’ w/ JCP and cited prices as being lower. Furthermore, customers cited bargains as harder to find and fewer aisles w/ deals.

JCP shoppers find ‘Best Prices’ hard to understand, difficult to compare to other prices (both non-sale and deal), and low value for money."

No matter how empowered and educated as a result of new media and more customer-centric information and technology, customers remain driven by the same human instincts that have long dictated behavior. And in the case of customers, it appears the thrill of getting a deep discount or closeout special continues to resonate, despite reality often calling the merit of such discounts into question.

People, it seems, would rather spend $17.50 for a product believing it is marked down from an artificial MSRP like $35 than spend $17.50 because that is the true value of the good.