Is Abercombie Violating the Second Rule of Pricing Strategy?

From “Skimpy Profits Pressure Abercrombie’s Pricing Attitude,” The Wall Street Journal, August 14, 2009

It is easy to make pricing more complicated than it really is.  This is particularly true with pricing strategy. There are only three strategies (skim, penetration, and neutral) and only two rules to live by. The first rule of pricing strategy is–you have to have one. Sounds obvious but most companies don’t. While they may make significant investments in processes and technology to control discounting, pricing without a strategy is like a runaway train–sooner or later, it’s going to go off the rails, which brings us to the second rule of pricing strategy. Once you have one, be prepared to change it in accordance with substantial shifts in the nature of customer demand and the competitive environment.

In the past, we have held retailer Abercrombie up as a great example of an organization that understands and plays by the two rules of pricing strategy. Last fall, while other retailers were running panic sales to dump inventory, Abercrombie CEO Mike Jeffries made it very clear that they would not follow suit. In a January earnings call, he offered up the following, unambiguous statement. “We believe what drives in store traffic is a fascination with what we do in store, and that is made up of an in-store experience that is second to none and compelling fashion. That’s how we drive volume in the stores. We are not promotional and will not be promotional.”  Strong stuff–and we admire CEO’s who focus on value and positioning and recognize the critical role that pricing discipline plays in maintaining them.

Jeffries gets high marks for adhering to rule 1. The question is whether he is ignoring rule 2. In sticking with a premium pricing strategy during tough times, Abercrombie has seen 30% sales declines at stores open at least a year in each of the first two quarters. This is a sure sign that its time to reconsider their strategy. “They don’t want to destroy the brand positioning that they have, which is the cool shop in the mall,” says Marie Driscoll, a retail analyst at Standard & Poor’s Equity Research. “But cool is changing. And part of cool now is value.” Time will tell if Jeffries is a visionary or whether by sticking with a pricing strategy for too long he is violating the first law of holes–once you find yourself in one, stop digging.