“Knowing Cost, the Customer Sets the Price”

March 29, 2012

This is the headline from a New York Times article that discusses how brick-and-mortar retailers like J.C. Penney are re-thinking their pricing due to the increasing smarts of their Internet-powered customers.

The article’s relevant for car dealers because it underscores two new realities of today’s business:

1. Pricing is a means to drive traffic, not make a profit. The article highlights how J.C. Penney is trimming its initial mark-ups to offer goods at more competitive prices. The company has found their initial 65 percent mark-up doesn’t gain traction with customers until they’ve offered deep discounts. The new pricing strategy effectively accounts for the discount right-up front—and minimizes the time clothing, appliances and other goods sit on the shelves waiting to get sold. (This, my friends, is velocity-based inventory management in action.)

J.C. Penney calls this “fair and square pricing” and hopes it will convey transparency and build customer loyalty. The article shares this quote from company CEO Ron Johnson: “The customer knows the right price. We can raise the price all we want; she’s only going to pay the right price. And why is that? Because she’s an expert.”

2.  Hagglers hold their fire when the price is right. The article highlights a 33-year-old Boston man who always seeks a discount from retailers—unless an item’s price strikes him as fair. Then, he’ll open the wallet without a peep about price reductions. This squares up precisely with the experience of velocity dealers who use market data to affirm and validate the value of their vehicle pricing to minimize discounts.

For me, this article is another sign that while the car business remains “distinct,” it’s not necessarily as “different” from other types of retail businesses as many traditional-minded dealers would like to believe.