The Psychology of Value

J.C. Penney is one of the oldest and most storied retailers still in existence in the United States. For years, J.C. Penney used a pricing strategy based on setting their retail prices high and then offering discounts and coupons which savvy shoppers could use to bring down the price of goods. Prior to 2012, a trip through any Penney’s store would present hundreds of red tags announcing discounts, clearances, overstock price reductions, and other deals. It seemed that everything in the store was always on sale, and with coupons generously distributed online and in newspapers, consumers could really feel like they got a deal.

In reality, Penney’s sale prices weren’t as big of a reduction as the labeling would make it seem. A $40 shirt had always been a $40 shirt, even if it was purported to have been marked down from $80 or $100. However, shoppers seemed to be OK with the sometimes tedious markdown-and-discount game. In spite of a slow but steady decline in year-over-year sales, many shoppers remained loyal to the century-old retailer.

In 2011, Penney’s hired a new CEO. He brought to the table a simple strategy for reversing the trend of declining revenue: get rid of the discounts and coupons and simply offer everyday low prices. That $40 shirt would now be simply priced at $40 without playing the “Clearance – Half Off!” game. At first glance, this seemed to be a win for everyone: shoppers get clear pricing without clipping coupons, and store staff are less burdened with the constant switching of discount labels and banners.

Soon after this new model rolled out, it became apparent that it was the wrong strategy. Consumers loudly voiced their dissatisfaction at the removal of the discounts and coupons, and even more of them simply took their business elsewhere. Sales took a nosedive and J.C. Penney lost billions. In the wake of the disaster, the new CEO was ousted and the old façade of high prices and liberal discounts was reinstated.

In hindsight, the Penney’s leadership team realized that consumers preferred the euphoria of believing they had found a great deal rather than the simplicity of a fixed low price – even if the latter resulted in a deal as good or better than the former. Irrespective of the actual price, the emotional component of the old, more complicated pricing structure was what kept customers coming back.

The Psychology of Value

On a smaller scale, I’ve seen technical professionals do the same thing J.C. Penney did with their pricing strategy. All too often, a superior solution is rejected by the user base for reasons that have nothing to do with how well-designed that solution is. This new widget might have all the bells and whistles required, but you’re going to be fighting an uphill battle if those tasked with using it every day don’t feel like it’s better than the old way of doing things.

For internal initiatives, this might seem like an easy proposition: with enough executive support, the “new thing” is often presented as the only option. In the real world, however, it’s rarely that simple. Between political battles, crafty workarounds, and occasional all-out departmental mutiny, forcing the adoption of a new solution is not as easy as just declaring, “This is the way things will be.”

If you’re in the business of creating products or services for sale – including software vendors, consultants, and cloud providers – it’s even more critical to make sure that your solution is in tune with the emotional expectations as well as the functional requirements of your constituency. When your business is dependent on convincing others to pay for the solutions you provide, you have to ensure that you provide them the value they expect – which goes beyond checking off a list of features and font colors.

How do you accomplish this? It’s both simple and time-consuming: You get to know your audience. Spend time with some of the people who will ultimately decide whether the proposed new thing is better than the old thing. Learn about their day-to-day challenges, the shortcomings of the existing system, and their fears about change. Find out where they and their peers interact online (forums, social media, etc.) and glean what you can from those interactions. In short: Don’t develop a solution in a vacuum.

Getting to know what your user base expects from a new solution, both functionally and emotionally, will make adoption of that solution far easier. It takes time to glean the types of insight you need, and even after doing so, any big change isn’t going to make everyone 100% happy. But it is worth the investment.

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This post was originally published in my Data Geek Newsletter.