Paying Less for Fashion Essay

Payless ShoeSource, Inc. is the largest footwear retailer in the United States. The company operates about 4,700 stores in all 50 states as well as Puerto Rico, Guam, Saipan, the U.S. Virgin Islands, Canada, Central America, the Caribbean, Ecuador, and Japan. It also sells footwear via the Internet at www.payless.com. Payless has built its success by offering a large selection of shoes at very low prices, most selling for less than $15 as of 2004. The company has been able to maintain its affordable prices by sticking exclusively to a self-service format, keeping a tight rein on cost structure, and insisting on efficient sourcing and inventory controls. Payless ShoeSource targets as its main customers women from 18 to 44 years of age with household incomes of less than $75,000, and it estimates that in any given year, 40 percent of the women in this target group buy at least one pair of footwear at a Payless store. The company remained a May subsidiary until 1996, when it was spun off to May shareholders as an independent, publicly traded firm. Payless ShoeSource founded in Topeka, Kansas in 1956 by brothers Louis and Shaol Pozez that is owned by Collective Brands, Inc, on a revolutionary idea – selling shoes in a self-select environment. In 1961, it became a public company as the Volume Shoe Corporation which merged with the May Department Stores Company in 1979. More than 50 years later, Payless continues the self-select model combined with leading customer service to provide a fun and engaging shopping experience for our customers. Today, Payless serves millions of consumers through its powerful global network of stores in all 50 U.S. states, as well as in Puerto Rico, Guam, Saipan, the U.S. Virgin Islands, Canada, Central America, the Caribbean and South America. The company also has an expanding presence in the Eastern Hemisphere through franchising arrangements. UPDATING 1956: Pay-Less National is founded in Topeka, Kansas, by two cousins, Louis and Shaol Pozez, to open self-service stores selling budget footwear. 1962: The Company goes public as Volume Distributors. 1967: The company is renamed Volume Shoe Corporation; an accelerated expansion program is launched. 1978: The Payless ShoeSource name is adopted for the bulk of the company’s retail outlets. 1979: Volume Shoe is acquired by the May Department Stores Company. 1991: The company name is changed to Payless ShoeSource, Inc. 1996: May spins Payless off to shareholders, making it once again an independent, publicly traded firm. 1997: The mid-priced shoe chain Parade of Shoes is acquired from J. Baker, Inc.; the first Canadian Payless stores open. 1999: The firm launches e-commerce at payless.com. 2000: Payless enters into a joint venture to expand into the Central American region. 2004: As part of a major restructuring, Payless announces that it will close down the Parade chain and close hundreds of Payless ShoeSource outlets. PEOPLE AND ORGANIZATIONS INVOLVED Matt Rubel: Nowadays he is Senior Advisor at TPG Capital, L.P. and TPG Growth and served as the Chief Executive Officer and President at Collective Brands. He served as the Chief Executive Officer and President at Payless Shoesource Inc., a subsidiary of Collective Brands. He served as the Chairman, President and Chief Executive Officer of Cole Haan, Inc from February 1999 to July 2005, where he transformed it into a global lifestyle brand celebrating American luxury. Prior to joining Cole Haan, Mr. Rubel served as an Executive Vice President of J. Crew Group. He is responsible for the success of Payless, Cole Haan and J. Crew. His involvement in this case is vital to these brands. http://investing.businessweek.com/research/stocks/private/person.asp?personId=23134722&privcapId=23307 Cole Haan, J. Crew: specialty retailers throughout the United States. Matt Rubel is the one responsible for the success of this two brands. They are competitors of Payless, but they also sell clothing. Carrie Bradshaw: fictional character and lead character of the HBO romantic sitcom Sex and the City, portrayed by actress Sarah Jessica Parker. This character was the icon of the decade and every woman wanted to look like her and dress like her. She was a fashionista and the sitcom revolved around fashion and clothing. Payless understood this trend and tried to approach women who wanted to look just like her, without spending that much money. Kenneth Cole, Michael Kors: top designers who were hired to fulfill their places in the Payless Design Team. They both had their own clothing lines, but Payless created an alliance strategy with their names and brands, so women would buy their shoes. This was a smart move by Matt Rubel. Lela Rose, Stacey Bendet, Christian Siriano: Haute Coture up-and-coming designers from New York City. One of them actually won a competition show named Project Runway. Payless asked them to take over their collections, aiming for haute couture, in other words, avant garde designs. They intended to sell cheaper shoes, but with great innovative designs. The typical fashionista was in for it. Mardi Larson: principal, owner and chief Marketing & Communications consultant at Mardi Larson Communications and has served a range of clients with consulting services and as a contract associate for more than a decade. Also included in her roster of clients are footwear brands like Sperry Top-Sider, Keds and Stride Rite, among others. She was the head of public relations of Payless, and developed the target marker for them. Maxine Clark: Maxine Clark was born on March 6 of 1949 in Florida, had her degree in law from St. Louis University. In 1996, Maxine Clark found â€Å"Build-a-bear workshop†. Prior to founding Build-A-Bear Workshop in 1997, Ms. Clark served as the President and Chief Merchandising Officer at Payless Shoesource Inc. from November 1992 to January 1996. Recognized the strategy of Payless, as to sell cheap and chic. Marian Salzman: American advertising and public relations executive. She is currently president of Euro RSCG Worldwide PR North America and a member of the holding company, Euro RSCG Worldwide’s Executive Committee, with brand reputation oversight for the company and key executives globally. She forecasted this trend that made Payless grow. Tiffany, Gucci, Armani: top brands that can be found in New York’s Fifth Avenue. They are the ones to set trends and women look forward to dress in their clothes. They are very expensive, and the middle class woman cannot buy them. This is where Payless supplies their demand of high fashion and affordable prices. Isaac Mizrahi: American fashion designer and TV presenter, best known for eponymous fashion lines. First big fashion designer to make an alliance with Payless. This made other brands and designers to focus on the company. They also wanted to work with Payless in a long-lasting alliance, with great benefits for both of the parts. Walmart, Kohl’s, Target: American retailers that were seen as great discount one-stop shops that had become the vendors of choice for tight budgets for buying shoes. Payless was competing with this major retailers and they needed something to differentiate from them. Their cheap and chic strategy was the solution to overcome this competitors. Elle, Vogue, W: fashion magazines that set the trends and state what is IN and what it’s not. Payless ran full-page ads featuring their new tagline â€Å"Look Again†. This was a strategy directed to fashionistas and frequent buyers of this magazines. They intended to show them that their shoes were so good that they were featured by this great magazines. Sophia Bush, Brittany Snow: both are actresses and fashion icons. Every teenager and young woman wanted to look like them. They were invited into the backstage of Lela Rose’s fashion show in New York Fashion Week, and were spotted wearing Payless shoes. They featured this Payless shoes and wore them proudly, announcing the fashion world that it was okay to wear something affordable and chic. Karl Lagerfeld & H&M, Vera Wang & Kohl’s, Ralph Lauren & JC Penney, Todd Oldham & Old Navy: this are examples of strategic alliances between great and recognized fashion designers and big retailers. This process of benchmarking made Payless realize that they also needed to make alliances with some big designers and brands. This is where Isaac Mizrahi decided to take the plunge with them, and design a whole collection of couture shoes. MAIN PROBLEM The main problem this company, Payless Shoesource, was facing was that in 2005 Payless was losing market share and began to close some stores. The retail landscape had changed and giant discount shops like Walmart, Target and Kohl’s had become the vendors of choice for budget conscious shopper’s buying shoes. With thrift as its positioning point, the company had lost its edge; they were producing the same shoes year after year hoping that price will bring customers to their doors. As we see the problem here was that Payless wasn’t innovating, they were pretending that the same styles would attract the same people to its stores because of the affordable price. STRATEGY When they noticed they have this problem Payless had to engineer a new strategy, it began with the new CEO Matt Rubel, he was hired because of its extensive experience with high-end brands, he knew that the company would have to design shoes that exclusive people would wear with prices that they could afford. Their new job was in charge of changing its image from the dusty cheap footwear into the fun, hip merchant of fashion. Rubel’s objective of their new strategy was not only give the brand image makeover but also position the company in such a way that the price increasing would seem like a bargain. Been more specific Rubel’s strategy plan was based on four major components. 1) Expanding the Brand Portfolio; this stage consisted in implementing what he calls â€Å"House of Brands† strategy instead of one product line create a well-known national brands. In terms to organize the new corporate structure and keep track of all its brands, he created a collective Brand. 2) The Payless Design Team; they want to develop products that would enter to the customers minds, that would resonate better with consumers, they were making emphasis on fashion, they Payless Design Team dedicated itself to develop original footwear and accessory designs to keep new styles on target with changing fashion trends. 3) Designer Collections; Payless created a strong relationship with some designers for the past, they have forged these three top New York based designers, so their homework was creating strong bonds with these designers, this benefits of this alliances are plentiful, because Payless gets brand cachà ©, making consumers get runway styles they can afford. 4) Fun Inspiring Store Formats; Payless redesigned its logo to reflect the new image and communicate change to consumers, they make some store formats, creating a new atmosphere, making a drastic improvement, stores more open, light and airy with a more satisfying consumer experience built around style and design rather than price. This new strategy implemented by the CEO Rubel will energize the old customers who they lost and also attract new ones. This trendy new image is perfect for existing customers. Payless has truck a formula for value that customers love. It remains confident that this strategy to democratize fashion will produce great results, regardless of future economic conditions. Furthermore of the implementation of the new strategy created by the CEO Rubel, Payless since its inception began with low prices or affordable prices, making a competitive advantage for the company, providing good profits. In 2008 when the global recession happened Payless took a hit, while other retailers were suffering because of its huge losses, Payless stores fared much better. Whereas the other retailers had loss many money in 2008, Payless gain a net profit of 88 million in 2009. To conclude, as well as the company manage two strategies to stay in the market and be competitive it would be great that for strengthen its strategy they can work in one of its four P ´s of the marketing mix, promotion, to attract more consumers, making more publicity of its brand and new designers that are part of the company, probably and we pretty sure they will bring more customers. If people know that those famous designers’ works for Payless, people are going to be more enthusiastic for buying good quality, good design for an affordable price. 1- Which of the different product mix pricing strategies discussed in the text applies best to Payless’s new strategy? From my point of view they are using a mix of different strategies. Firstly, skimming pricing. This is about selling a product at a high price, sacrificing high sales to gain a high profit, therefore ‘skimming’ the market. They have invested a lot of money to hire top notch designers, rebranding effort like remodeling stores etc. There needs to be some mechanism (read, strategy) to recover this cost. For some items they have even employed premium pricing. Interestingly, Payless came up with some really good product like Lela Rose, Abaete etc. On the other hand, they have products which are low as $12. As best strategy that they are employing; I would say that they are going for Product Line Pricing. They want their customers to get attracted by the big brands in their portfolio. In that way, other products will gain due importance too. So to customers, overall portfolio will look very attractive. The strategy for setting a product’s price often has to be changed when the product is part of a product mix. Companies usually develop product lines rather than single product. Product mix means in the same companies have many type product with they are brands it sold. Product mix pricing strategies consist of five elements which is product line pricing, product bundle pricing, by-product pricing, captive product pricing and optional-product pricing. In this case, the product mix pricing strategy Payless use is product line pricing. Product line pricing is setting the price steps between various products in the product line based on cost differences between the products, customer evaluations of different features and competitor’s prices. Payless has strategy product line, from one comprised almost entirely of store brands to one dominated by well-known national brands. Payless now sells shoes under numerous brand names that it either owns or licenses, including Airwalk, Champion, Spalding, Dexter, Shaquille O’Neal-endorsed Dunkman, and various Disney brands. Customer can buy many types of products with different prices by looking at size, width, color and design. For example, for boys’ shoes, they have many shapes, size, color, design, and numerous brands which they can get with difference price from $ 12.99 until $26.99. For girls, there are shoes in differences brand like Fioni, Amerian, Eagle, Dexter, Lela Rose, and Smartfit from $14.99 until $24.99. Most products Payless offers are under $50. Other than that, Payless has relationship with top New-York based designers Laura Poretzky, Lela Rose, Stacey Bendet and Patricia Field. The four are designing everything from pumps to boots to handbags for Payless. Payless sets most of the stores product line below $15. The company’s CEO, Matt Rubel also has suggested that in many cases, price increases may be as little as 50 cent per pair of shoes. But the expansion of its brand portfolio to include famous labels will certainly give payless greater pricing flexibility. 2- How do concepts such as psychological pricing and reference pricing apply to the Payless strategy? In what ways does Payless’s strategy deviate from these concepts? By definition, psychological pricing on the theory that certain prices has a psychological impact. The retail prices are often expressed as â€Å"odd prices†: a little less than a round number, e.g. $19.99 or  £2.98. There is no explicit reference given in the case where we see that they are using this strategy. As a matter of fact, we see that though Payless is increasing the price of their products. So, sudden upward movement of price may come as a shock to customers. This strategy of Psychological pricing can be employed in this scenario. Payless actually did not pay a heed to that and did not come up with any proper plan towards psychological pricing. In what ways does Payless’s strategy deviate from these concepts? By definition, psychological pricing is a pricing approach that considers the psychology of prices and not simply the economics. The price is used to say something about the product. Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics. In the other hand, reference pricing is prices that buyers carry in their minds and refer to when they look at a given product. Consumers usually perceive higher-priced products as having higher quality. But what happen in Payless is, they did not increase the price of their product to gain higher quality product perception, but changed the image from dusty dungeon of cheap footwear into the fun, hip, merchant of fashion. In addition, Payless even re-designed their logo for the first time in 20 years. They then launched new â€Å"Fashion Lab and â€Å"Hot Zone† store format. It was a drastic improvement. As the result, Payless store now have more open, light, and airy thus creating a more satisfying consumer experience. Payless is now looking forward into style and design rather than price. This is where Payless’s strategy deviate from psychological pricing concept. Payless focuses more towards style and design of their product rather than price. They even upgrade their store environment into more comfortable places which then create customer satisfaction. With the new store environment, it makes the $12 shoe looks like a $20 shoe. However, Payless’s manipulating the reference pricing by implementing a drastic improvement in their store. They launched a new â€Å"Fashion Lab† and â€Å"Hot Zone† store format to create more open, light, and airy with a more satisfying consumer experience built around style and design rather than price. The new format not only attracts more customers, but they even make the customer willing to pay a little bit more than they have in the past. All new Payless stores now have one of the two new formats and old stores are being progressively remodeled. 3- Discuss the benefits and risks of the new strategy for both Payless and the designers with whom its partners. Which of these two stands to lose the most? Benefits of the new strategy would be for both, for the designers and for the company, those designers when working for Payless are going to be more recognized for most of the people, they are going to become more famous, they are going to outstand from the others, also people who really knows this designers would buy more frequently shoes on this store making this company richer. Now talking of the risks of the new strategy would be that for the designers maybe they are not well-paid for their work and also they lose status for working to a shoe retailer. Some people might not like these designers anymore because they are working on that company, so they lose credibility. A risk for the company would probably that maybe making these relationships with those designers they have more costs so it would not be sustainable for the company. We think that designers would go to lose more, because as we mentioned before they would lose credibility and consequently they are going to lose loyal customers. 4- Consider the scale on which Payless operates. How much of a price increase does Payless need to achieve to make this venture worthwhile? Payless was looking to move its average price point up a notch or two, due to the expansion of its brand portfolio to include famous labels that will certainly give Payless greater pricing flexibility. What they can do it’s a price adjustment strategy, looking for some variables they can apply to that specific company. For example they can use segmented pricing, they can segment their market. Psychological pricing, buyers have a reference of its price in their minds, also they can use geographical pricing; they can design different types of shoes for a different country depends on the fashion and the weather and also international pricing, analyzing some specific factors of the country, like laws and regulations, economic conditions. Looking all this price adjustments strategies they can achieve a good price depending on the place and making this venture worthwhile for the company and for the customers.