Nordstrom: Price Menu Management Delivers Results

Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published June 3, 2010

Going into the great recession, many commentators suggested and corporations undertook across the board price cuts. Many, but not all. Nordstrom took a different route. The results of their approach are in: better customer attraction, better profits, better post-recession positioning.

In this article, we will examine some key strategic decisions made by Nordstrom which enabled their counter-trend approach to triumph over the oft quoted “best practices”.

Off to a Rocky Start

Nordstrom wasn’t immune to the great recession. Being heavily concentrated on the left coast, they felt the housing bust, credit crunch, job losses, and demand decreases earlier and harder than most clothing retailers.

For the initial period of the Great Recession, Nordstrom reported both declining income (8.6% decline for 2008 fourth quarter) and declining same-store-sales (6.6% decline for the first two weeks of January 2009).

As bad as these results were, they were somewhat similar to their competitors and were definitely no worse on average. An armchair analyst might have suggested that they cut cost, entrench, and increase discounts in order to plow through the recession in the hopes of coming out of it well at the other end. This was the route taken in one form or another by industry giants such as Wall-Mart, Target, Saks, and Macy’s. If the leaders are doing it, so should the followers. Yes?

However, Nordstrom’s took a different route.

Increased the Menu Options

Instead of resorting to fire-sale clearances and operational cost reductions, Nordstrom expanded its offerings. Their new menu of offerings included a new exclusive line of Elie Tahari professional women’s clothing priced 30% lower than Elie Tahari’s main collection and the under $100 Easy Money jean brand.

The result of their broader menu of prices was customer relevancy:

During the Great Recession, customers were able to find attractive products at a price which fit their newly constrained budget better at Nordstrom than at their competitors.
After the Great Recession, customers that were acquired during the recession changed their loyalties and continued shopping at Nordstrom.
Nordstrom remained relevant to the market, while competitors either lost relevancy or retained it at a great cost.

Glowing Cashflow and Market Share Results

By remaining relevant, Nordstrom has exited the Great Recession earlier, and in better health than most of its competitors.

2009 fourth quarter profit rose 11%
2010 first quarter profit rose 44% on increased customer visits and higher sales
2010 first quarter margins improved by 2.4% due to reduced discounting
Same-store-sales are predicted to increase by 4% to 6% for the remainder of 2010

These superb financial results are the consequence of Nordstrom doing exactly along the lines Peter Drucker, the great guru of strategy suggested: create and capture profitable customers. For Nordstrom, their strategy of expanding the menu of options instead of reducing them, and of attempting to maintain prices while introducing new lower priced options instead of focusing on discounting, enabled them to create and capture profitable customers both during and after the recession.

Resilient Strategy

When pricing progresses beyond the daily block-and-tackle of product pricing and discount management, executives are prepared to act strategically. Price menu management isn’t a trivial decision executives should delegate, it is a core strategic decision for the firm. Executives who appropriately manage this decision should expect their firm to not only survive, but more importantly have a resilient strategy.

References

Ilan Brat, Ellen Byron, Ann Zimmerman, “Retailers Cut Back on Variety, Once the Spice of Marketing,” Wall Street Journal (26 June 2009), A1.
Rachel Dodes, “Nordstrom’s Caution, Price Mix Paying Off,” Wall Street Journal (23 December 2009), B1.
Rachel Dodes, “Nordstrom Income Soars,” Wall Street Journal (23 February 2010), B3.
Rachel Dodes, “Nordstrom Posts Profit Increase, Lifts Forecast,” Wall Street Journal (14 May 2010), B7.

Posted in: Pricing
Tagged: , retail

About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.