When it comes to retailing, a company’s success depends as much on properly positioning its products as it does on the actual products being offered.

That's why many companies sell products at prices which end in $0.99 and $0.95. Someone figured out that selling a product for $3.99 caused customers to purchase more enthusiastically than if it cost $4.00.

Similarly, for years companies have used the “sale” to motivate shoppers, even though many suspected that retailers marked up their prices before putting an item on sale.

In 2012, J.C. Penney (NYSE: JCP) decided to do away with sales altogether, and paid a heavy price as a result.

Drastic Measure Needed

One of the problems J.C. Penney has faced in recent years is that its sales model is now being eclipsed by online and boutique sales. In 2012 while facing declining revenues, declining foot traffic in their stores, and a dire outlook, J.C. Penney CEO Ron Johnson decided to do something drastic: do away with sales.

His reasoning was that retailers routinely mark up their prices in order to be able to offer customers attractive sales, a practice which Johnson labeled as making “fake prices.” Instead, Johnson announced that J.C. Penney would offer prices which were consistently attractive, and do away with the concept of the sale altogether. Bad idea.

As a result of Johnson’s “no sale” experiment, J.C. Penney’s revenue got clobbered in 2012. Same store sales were down about 33% from their 2011 numbers, and revenue for the year was down about 25%. J.C. Penney was forced to layoff upwards of 19,000 employees, and was left reeling from the experiment.

Not surprisingly, the move eventually cost Ron Johnson his job. It probably cost J.C. Penney thousands, if not tens of thousands, of customers too – causing them to switch to shopping at other retailers such as Wal-Mart and Target.

Didn't Understand Human Nature

While there have been many write-ups on what went wrong with the J.C. Penney “no sale” experiment, that outcome should have been relatively easy to predict as it violated basic principles of human nature.

People love getting a bargain.

With the rise of online auction site eBay - which built his reputation squarely around people who were willing to bet that they would be able to get a great deal through the means of participating in an auction, and sites such as Groupon.com - which allow people to take advantage of amazing coupon deals, J.C. Penney should have seen early on that its experiment of eliminating sales was doomed.

In fact, the company did exactly the opposite of what it should’ve done. Instead of eliminating sales, J.C. Penney should have invested more heavily in them by increasing online and traditional promotions.

Related Articles
  1. Active Trading

    Qualitative Analysis: What Makes A Company Great?

    To understand the qualities that make for a great company, investors must dig deep into "soft" metrics.
  2. Active Trading

    Does Bad PR Make For A Good Investing Opportunity?

    Like most other kinds of turnaround investing, investing in the face of bad PR can be a high-risk/high-reward situation.
  3. Personal Finance

    Wall Street: Where The Customer Is Always Wrong

    In the financial industry, there's not much emphasis placed on dealing with customer complaints, but there should be.
  4. Entrepreneurship

    CEOs Who Blazed The Trail (Kroc, Hock And Welch)

    The right CEO can make all the difference in a company's market position.
  5. Budgeting

    Bespoke Post Review: Is It Worth It?

    Find out if Bespoke Post, the fast-growing, e-commerce subscription service for men's lifestyle and grooming products, is worth all of the hype in this review.
  6. Stock Analysis

    The Biggest Risks of Investing in Costco Stock (COST)

    Read about some of the biggest risks of investing in Costco stock. Gain a better understanding of its business model before buying in.
  7. Stock Analysis

    The Top 5 Retail Penny Stocks for 2016 (TWMC, DXLG)

    Find out which retail stocks trade for less than $5 a share. Learn about bargains that can avoid bankruptcy and produce nice returns for investors.
  8. Stock Analysis

    Wal-Mart's 3 Most Profitable Lines of Business (WMT)

    Learn about the key drivers of Wal-Mart's profitability as the company is concluding its fourth quarter, which is the period of its highest sales and income.
  9. Stock Analysis

    4 Executives Who May Be On Thin Ice in 2016 (CMG,TWTR)

    Find out the reasons why these executives of underperforming companies may find themselves on the chopping block in the coming year.
  10. Investing Basics

    4 Value Plays in the Retail Sector for H1 2016 (BBBY, WMT)

    Discover four value stocks of companies operating in the retail sector that can prove valuable investments for the second half of 2016 and beyond.
  1. Does QVC accept debit cards?

    QVC accepts debit card payments as one of its many payment options. The company, which is the world’s leading video and e-commerce ... Read Full Answer >>
  2. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
  3. Can you pay off a Walmart credit card in store? (WMT)

    Wal-Mart Stores, Inc. (NYSE: WMT) allows multiple payment options for its credit cards, including in-store payments. The ... Read Full Answer >>
  4. Does Walmart take international credit cards?

    Foreign visitors to Walmart locations in the United States can use their credit cards issued by banks outside of the U.S. ... Read Full Answer >>
  5. How has Google's operations strayed from its original mission statement?

    Google's (GOOG) mission statement has been the same since its inception in 1998: "Organize the world's information and make ... Read Full Answer >>
  6. How can I invest in electronic retailing (e-tailing)? (AMZN, W)

    Electronic retail is one of the fastest growing segments of the economy. Every year, more people are choosing to purchase ... Read Full Answer >>
Trading Center