The Logic Gap

Information alone does not change minds

Things that seem obvious to some completely escape others.

I’m doing a lot of research for my book right now and I’m finding there’s often a disconnect between the best practices recommended by practitioners and the actions recommended by academics.

Which I found counterintuitive, since academics have studies and data behind them. I recognize that practitioners have data as well, but much of it is often from experience and trial-and-error learning. Not necessarily tracked and noted.

The pictures from this issue are from my brother’s (Michael Abel) and sister-in-law’s (Nava Abel) house. She’s an artist, he designed and built the house.

Even still, it reminded me of something I learned during my MBA. Most start-ups founded by academics fail. Note: most start-ups fail, period. Our professor explained this with, “…most academics don’t have actual business experience and real life doesn’t care about theory.”

Of course the reality is more nuanced. Academic led startups have higher technical breakthroughs, and practitioner led startups have significantly higher financial success (which was how success would was defined by my Venture Capitalist professor.)

This tension between ‘what should work’ and ‘what actually works’ is exactly what killed one of retail’s most famous turnaround attempts. I explore this famous failure in my book:

The Perception Gap

I grew up calling Target “Tar-zey Boutique” thanks to Ron Johnson, the guy who created Apple’s Genius Bar and upgraded Target’s brand. He was the “Golden Boy” of retail and famous for upgrading brands and multiplying revenue. I hate the word “revolutionize”, but if anyone’s work could be described that way, his work with Target and Apple could be. If you’ve succeeded once, you’re lucky. If you’ve succeeded twice, you’re good, so naturally expectations of Johnson were high when he was brought in to revamp J. C. Penney.

At the time of his hiring in 2011 J. C. Penney ran 590 separate sales events a year. Seventy-three percent of products sold at a discount. According to everything in the textbooks and case studies, this is a classic way to kill your brand. He wanted to elevate, simplify, and build.

Johnson introduced “Fair and Square” pricing. No more fake high prices, constant sales, or mess. Instead, he would offer the items at the price they typically sold for without having people go through the hoops of sales, plus discounts, and coupons. I remember when he was hired and launched this initiative. I remember reading about this when it was launched, and I thought it was brilliant. It went along with everything I had been taught about retailing and brand in my undergraduate degree and my MBA. This is why there’s a difference between academic work and practitioner work, which you’ll read more about later in the book (specifically during negotiation).

The new pricing strategy was transparent, respectful, and the end price was identical to what they would have paid previously. And yet it went horribly wrong. Sales collapsed by 4.3 billion dollars. Revenue dropped by 25 percent. J. C. Penney’s stock tanked. Customers were angry and felt alienated. Johnson was fired after 17 months.

What Went Wrong?

J. C. Penney was synonymous with sales, and the new pricing felt like a betrayal of everything J. C. Penney had ever stood for (history). It felt wrong. J. C. Penney was always okay being solidly middle class (heritage), meant for moms who clip coupons and pinch pennies. The sales made you feel like you had accomplished something, and you could go back and brag to your friends how you got this 50 dollar shirt for only 15 dollars. Taking that away was ripping the feeling of accomplishment (dopamine, reward learning, and anticipation) out of the customers’ hands. They didn’t want the item for the “fair” price, they wanted to feel like they got a deal. A 15 dollar shirt is cheap, but a 50 dollar shirt for 15 dollars was good value. By removing the anchor (the anchoring heuristic, where the first price seen shapes value), the 50 dollars no longer framed the bargain and the shirt no longer felt like a deal.

Customers also had a reference price formed over years of coupons and discounts, and everyday “fair” pricing violated that internal reference price.

The logic was sound, and maybe if he had a decade to implement he could have repositioned the company in the way of his vision. Instead he was ousted after about 17 months. The change was too abrupt, and his intent of honest pricing was received as a loss of bargains. People perceive losses much more strongly than they perceive gains, a pattern known as loss aversion, so they didn’t really care about gaining honest pricing. They cared about losing the apparent bargain, even if they were actually paying the same end price. That difference is the perception gap. We’re told to do unto others as we would have things done unto ourselves, but the Golden Rule doesn’t always work because there’s so much more at play, especially in business.

Understanding the Result

This is what makes the Perception Formula useful. It wasn’t just one thing that tanked Johnson’s strategy. It was all four elements working against him at once: the heuristics (anchoring), the hormones (dopamine from the ‘win’), the history (years of coupon conditioning), and the heritage (J.C. Penney’s middle-class identity). When you ignore all four, you get schooled with a $4.3 billion lesson. Ouch.

How could Johnson make such a mistake? His previous projects were high growth projects of already successful companies, not turn arounds. It’s a very different skill set and his previous experience didn’t get him ready for it. He did what was the right thing to do according to the textbooks at the time (it definitely aligned with what I was taught and believed), so it was logical to think that it would go well. I found nothing in my research to show that they did risk scenarios about how people would react.

How to Use the Perception Gap

Are you launching a new initiative soon? Consider the following questions for your audience:

• What mental shortcuts do your customers or stakeholders have?

• What emotional reward are they getting from the current state?

• What history do they have with you, your brand, or your industry?

• What cultural identity does the current approach reinforce?

If your strategy doesn’t work with the way the people you need buy-in from think, you might want to reconsider re-framing it.