What to Expect: J.C. Penney's New Pricing Strategy

(Image credit: Matthew Staver/Bloomberg/Getty Images)

J.C. Penney is betting that its new "Fair and Square" pricing strategy, which takes effect Wednesday, will lure customers into the store year-round instead of only at sale and promotion time.

J.C. Penney  CEO  Ron Johnson  announced the  new pricing strategy last week in New York, saying it would encourage customers to visit the store 12 times a year, for 12  "month-long values."  Johnson said in an interview with the Associated Press that the store's No. 1 competitor was not another store, or the Internet, but "ourselves and our way of thinking."

Johnson said he believes  customers are insulted by department stores' usual strategy of offering items at high prices,  then offering discounts.

"Customers will not pay literally a penny more than the true value of the product," Johnson told the AP.

Peter Wahlstrom, a senior analyst with investment research firm  Morninstar Inc., called J.C. Penney's three-tier pricing  strategy a "dramatic undertaking."

The company, based in Plano, Texas,  will first offer its lowest  or "best" prices on the first and third Fridays of every month.

"What the company figured out is customers aren't coming into the store frequently enough," Wahlstrom  said. "They've been conditioned to only look at things at a discount."

Informing customers  that items will be on sale starting on  two specific days a month may help manage shoppers' expectations and provide some information as to whether prices will be marked down further, Wahlstrom said.

The company will also offer "month-long values" on specific items, which will also help shift the customer mentality of waiting for additional price drops.

Wahlstrom said the month-long pricing strategy could open  a can of worms, however, if customers delay making  purchases in the hope that  items will go  on sale later.

Third, other items will be priced in red, indicating everyday, low prices that will be about 40 percent off 2011's retail prices without coupons or weekend sales. Wahlstrom said the monthly and clearance sale items could be be loss-leaders, which means the department store will not make much or any money on them. But J.C. Penney is counting on customers' also purchasing products from well-known national brands, such as Martha Stewart and Liz Claiborne.

J.C. Penney has put its focus on fewer, "more relevant" brands, as Wahlstrom described them, and less on private brands  that are "less efficient," such as  Arizona and Worthington.

"You want that customer to come back and frequent your store, but you don't want them to just shop for items that don't make you any money," Wahlstrom said.

Wahlstrom said the new pricing strategy "makes sense" for the company's goals, but the company still had a tough road ahead in proving itself  to customers.

"It's not going to be a straight line. It's going to be fairly choppy. There will be growing pains along the way," said Wahlstrom.