The Major Rebranding Initiative

Ron Johnson wasted no time in overhauling JC Penny's brand identity, starting with a new logo and name. The store transformed from JC Penny to JCP, adopting a sleek, modern logo reminiscent of Apple's design.

Johnson also revamped the retail environment, aiming to attract a younger demographic. He replaced well-established store brands with numerous smaller boutiques, collaborating with brands like Sephora.

While this strategy might have appeared logical, it overlooked the fundamental psychology of JC Penny's loyal customers. The store's primary clientele consisted of lower middle-class women—primarily mothers—who were searching for affordable clothing and home goods.

By introducing a retail experience that felt entirely different, JCP alienated its core customers. This phenomenon is known as the Self-Reference Effect, which suggests that individuals connect with experiences that mirror their self-image. If customers no longer perceive a store as a place for them, they're less inclined to shop there.

As a result of extensive renovations, JC Penny's longtime shoppers no longer identified with the brand, while younger consumers remained uninterested, viewing the store as a place for their grandparents to find bargains.

Price Perception: A Key Factor

JC Penny was synonymous with discounts, attracting bargain hunters who thrived on the thrill of potential savings. However, Johnson believed that sales devalued a brand, so he eliminated discounts and introduced a pricing strategy he termed "Fair and Square."

This new approach consisted of three price categories:

• Everyday Prices: Stable prices that remained unchanged
• Month-Long Values: Seasonal sales for specific events, such as back-to-school
• Best Prices: Clearance items

Though this pricing model seemed straightforward, Johnson failed to grasp the psychology behind price perception. Pricing is largely a psychological exercise, focused on how consumers feel when they encounter a price or discount.

JC Penny's patrons yearned for the sensation of having saved money, which markdowns provided through a psychological principle known as Anchoring. This concept posits that initial information significantly influences decision-making.

When a customer sees a blouse originally priced at $60 marked down to $15, it creates a perception of a deal—even if the actual savings aren't substantial. For JC Penny's audience, the feeling of securing a bargain held more value than the reality of it.

The Impact of Pricing Strategy

One crucial aspect of the "Fair and Square" pricing strategy was the removal of the '99' from prices. Instead of a sweater costing $15.99, it was now priced at a flat $15. This seemingly minor change had significant implications, as research indicates that prices ending in odd numbers, like '99', are often more appealing to consumers.

This pricing tactic, known as Odd-even pricing, has been shown to stimulate demand for various products by creating a perception of a better deal.

The Downfall of a Retail Visionary

Ron Johnson's strategy for JC Penny was largely influenced by his successes at Apple. However, he failed to recognize the fundamental differences between the two companies and their respective customer bases.

This oversight is an example of the Hot Hand Fallacy, a cognitive bias where individuals mistakenly believe that past successes guarantee future success.

In sports, this might be seen when a player, like LeBron James, hits several three-pointers in a row, leading spectators to assume he’s on a continuous winning streak. However, past performance doesn’t ensure future results.

Although Johnson had a commendable track record with Target and Apple, a few victories don’t guarantee ongoing success without proper testing and adaptation. When questioned about his reluctance to experiment with his ideas, Johnson simply replied, "We never tested at Apple."

To dive deeper into behavioral science and its application in business, consider exploring:

• My popular course: Behavioral Science and Psychology 101 for Marketers.
• The free weekly Choice Hacking podcast.
• A complimentary chapter from my bestselling book, Choice Hacking: How to apply psychology and behavioral science to create an experience that resonates.