The art of the apology: Will JCPenney’s strategy work?

Apologies are a delicate matter, and the success of an apology can depend more on the type of error than the nature of the confession. People tend to be forgiving of errors caused by lack of experience or inability to perform in a challenging environment. U.C. Davis professors Kimberly Elsbach and Steven Currall say these incompetent acts can be attributed to factors outside a person’s direct control.

In fact, shareholder letters commonly acknowledge mistakes in judgment that affected business performance. These acknowledgements are generally accompanied by an equally candid discussion of lessons learned and improvements implemented.

However, many business mistakes are not caused by incompetency but a lack of integrity. One prevalent reason for error in business is arrogance. When business leaders become overly confident in their own capabilities and start to feel invincible, the risk of hitting an iceberg increases dramatically.

Elsbach and Currall say their research reveals that people are not forgiving of lapses in morality (e.g.,  arrogance, dishonesty, corruption). Mistakes that reveal a lack of integrity are perceived as permanent character traits, which reveal a dearth of moral fiber.

The Price of Arrogance at Netflix

In 2011, Netflix caused customer outrage when it increased prices by 60% and informed its loyal customers of the changes in a brief, matter-of-fact email.  A few months later, 800,000 angry and outspoken customers defected.

The company’s CEO Reed Hastings apologized to customers through video and written blog posts. Today he freely admits that the company’s tremendous success and his own personal arrogance blinded his view of customers’ interests. However a year after Hastings’ candid apologies, the company slid to its lowest stock price. Essentially, the apology was not effective.

The true cost of arrogance has a long tail. Netflix’s stock is enjoying a healthy rebound in 2013, yet Hastings is not celebrating. According to an April 27 New York Times article, Hastings said the company has little room for error, “It’s like a partially healed bone,” he said. “It’s still quite fragile. Were we to make a similar mistake, we’d be right back in the penalty box.”

Alienating traditional customers

JCPenney’s stumble is similar to Netflix’s in that the company’s policies disaffected its core customer base. Traditional customers lived for the emotional high of getting a deal, which eventually became a weekly ritual. When the company suddenly stopped coupons and weekly sales, customers lost their emotional attachment to the store and started shopping elsewhere.

Many stock analysts attribute Ron Johnson’s errors to arrogance. Their analysis frequently cites that Johnson didn’t test these strategies before implementing them at over 1000 retail outlets. Moreover, Johnson’s modern store layout and elimination of weekly sales and promotions were designed to attract a new, more upscale customer base. Remarkably, these weekly promotions were stopped before strategies to attract new customers were ready to roll out.

Other instances of apparent arrogance include the fact that Johnson chose not to relocate to the company’s Texas headquarters and instead commuted by private jet.  The most significant sign of arrogance was that traditional customers were alienated before new customers could be enticed. It seemed as if Johnson wasn’t interested in the core customer, which makes many wonder if he had any genuine interest in or respect for the core brand.

The Customer Experience

The effectiveness of JCPenney’s apology depends on the type of error its customers believe the company made. Their perception of these radical changes in pricing and store layout will determine their willingness to give the century-old retailer another try.

On Facebook, the company posted its new commercial on May 1 and as of today has almost 57K likes. The social media campaign goes by the name #jcpListens, and its YouTube commercial shows about one million views. One thing the commercial and campaign can take credit for already is a high level of engagement and awareness.

Stock analysts are influential on Wall Street; however, it’s unlikely that JCPenney’s customers are overly concerned with the company’s CEO. Customers care about their experience with a brand, particularly their emotional experience. When the company changed its pricing strategy, customers experienced an emotional disappointment. How did that disappointment resonate? Basically, did customers interpret the company’s decisions as arrogance or just foolish?

The numbers will tell.

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