Explain Retail Pricing To Me

[Mike]

Yesterday I ventured into Eddie Bauer and bought a pair of chinos with a $59.50 price tag, on sale for $19.99. As I was walking home, I began pondering whether I had once again triumphed over the system (I can't recall the last time I bought any clothing at full retail price) or had been duped into purchasing a pair of chinos that really was "worth" only the sale price of $19.99.

 

This question popped into my head as I recalled that the national chains have some sort of "sale" going on nearly year-round. For those of you in retail, how does this work? Do these stores actually only make money on their full-price merchandise and use the sales to simply draw in customers, or are these sale items what drives profits, based on greater volume? My totally uniformed hypothesis is that the chains don't generally lose anything on these "Nearly Everything's On Sale" promotions unless they've overestimated demand for an item, but I don't really understand the strategy, or from what sales these retailers derive their profits.

[tallman]

Yesterday may have been the end of fiscal year.

Cheaper to sell it than to inventory it.

Or, you just bought a pair of cheap shoes.

 

The term "sale" always bugs me.

If I walked into the store the day before it was "on Sale", could I not purchase it?

Price reductions and "sales" are two different facets of retailing.

They are done to move slow selling items, clear out inventory due to new stock arriving, sell inventory from out of business vendors, reduce tax liabilities, etc.

 

Depending on the merchandise, even after significant recutions profit may result.

Not true in every area of retail sales.

 

I love to look at an item marked "on Sale today only" and tell them I'll come back tomorrowwhen the price goes back up because I don't like to buy cheap stuff.

[Bob Palin]

I love to look at an item marked "on Sale today only" and tell them I'll come back tomorrowwhen the price goes back up because I don't like to buy cheap stuff.

It would take 3 years to explain that to the average mall sales person.

[DaveTheAffable]

Various states do have 'regulations' on advertising. Years ago Radio Shack had a HUGE lawsuit because it was shown that for months, or even years, they advertised a "Sale" price and the "Regular" price. Investigators proved that some products were "never"(?) sold at the "regular" price.

[Albert]

Or, you just bought a pair of cheap shoes.

 

If he's wearin' chinos on his feet he ain't worried about sales.

[Joel]

If you walked out with only the Chinos, EB lost its hedged bet, and you won. Many shoppers will spend their "savings" on another item that isn't so steeply discounted, in which case EB wins. And, a lot of shoppers will pay full price most of the time, creating a larger margin of victory for the retailer.

 

One of many definitions of an "idiot" is anyone who pays full price for something at Kohl's. :smirk:

 

 

[bakerzdosen]

Well, obviously there is a psychological aspect to it as well. I don't claim to be the expert on all things (any things?) psychological, but here's what I understand:

 

If the chinos (or whatever product) were marked $19.99 to start, and you bought them for $19.99, you'd feel like you received exactly what you paid for - a $20 pair of pants. However, since the pants were originally marked at $60, you now feel like you're getting a steal - you're getting a $60 pair of pants for $20. The pants probably cost them $8-$12 to produce, and obviously the additional markup pays for infrastructure and profits. So, if they actually get $60 out of them, so much the better.

 

Nonetheless, you wouldn't have thought twice about it if you'd purchased a $20 item for $20.

[Lets_Play_Two]

If you walked out with only the Chinos, EB lost its hedged bet, and you won. Many shoppers will spend their "savings" on another item that isn't so steeply discounted, in which case EB wins. And, a lot of shoppers will pay full price most of the time, creating a larger margin of victory for the retailer.

 

One of many definitions of an "idiot" is anyone who pays full price for something at Kohl's. :smirk:

 

 

The concept of winning or losing in a retail transaction is interesting psychology. How do you know if you win and the retailer lost? Do you win if you buy the chinos at $19.95 but could get the same item elsewhere for $14.95? How do you factor time and effort into the won/loss equation? Do you win if you decide not to buy because you think the retailer might win? What exactly is a pair of pants worth?

 

If you lose were you cheated? This could be a very interesting topic. What is the win/loss line for labor charge for working on a BMW? I need some work done and need to know if I will win.

[Mike]

Well, obviously there is a psychological aspect to it as well. I don't claim to be the expert on all things (any things?) psychological, but here's what I understand:

 

If the chinos (or whatever product) were marked $19.99 to start, and you bought them for $19.99, you'd feel like you received exactly what you paid for - a $20 pair of pants. However, since the pants were originally marked at $60, you now feel like you're getting a steal - you're getting a $60 pair of pants for $20. The pants probably cost them $8-$12 to produce, and obviously the additional markup pays for infrastructure and profits. So, if they actually get $60 out of them, so much the better.

 

Nonetheless, you wouldn't have thought twice about it if you'd purchased a $20 item for $20.

 

There is something to that. As proof, whenever I walk by that store, I check out what's "on sale." As you note, this is not something I'd think to do if I didn't get the occasional "bargain." Another thing that always happens--and this is nothing more than good business--is that the salespeople always suggest something to go with my newly-found bargain. I never go far that, but I'll bet a lot of people do.

 

What I wonder, though, is how sales at the different price points (i.e., the few pants sold at $60 versus the greater number sold at the discounted price of $20) figure into a retailer's overall profit plan. Obviously if you look at only as a single transaction, the former is better for Eddie Bauer, since their profit is $40 greater. How thin (or hefty) are their profits on the discounted product? Are they making money on the individual $20 transaction, or is it a sacrificial sale at cost, to drive more profitable sales?

[smiller]

Are they making money on the individual $20 transaction, or is it a sacrificial sale at cost, to drive more profitable sales?

I would expect that it it's sometimes one, sometimes the other, and possibly influenced by any number of other factors. I doubt that there's any universal answer.

[hopz]

Do these stores actually only make money on their full-price merchandise and use the sales to simply draw in customers, or are these sale items what drives profits, based on greater volume?

 

I have retail experience. Yes they make profit on regular priced merchandise. Do they money "only" on full price good- No. Yes, "Sales" bring in customers. Yes they make profit on Sale merchandise. No, Sale items do not really "drive" profits but they do add to profits.

 

The majority of sales happen at the regular retail price... Sale priced stuff usually occurs at a lower profit margin but generally not at a loss... put it all together and you have the gross margin figure on your income statement. As long as the Gross Margin is in the acceptable range things are doing fine.

 

Sometimes you can closeout the not-selling stuff or wholesale it to firms who specialize in closeout goods. Sometimes you can even make a little on this level of sale. Sometimes it is better to get rid of it at any price since there is a cost of inventory and rack space etc.

 

One thing we used to say... everything sells... eventually.

 

The real story is that different customers buy for different reasons. If you have a fashion-conscious customer they do not wait for a sale. They want it now because it is fresh and new. Others buy some things that way and some after the bloom is off. Some make it a policy to never buy at retail but only wait for sales...

 

I have this really cool Members Only jacket, with epaulets... check the classified section for a good deal...

 

 

 

[motoguy128]

For hte most parts it seems like supply and demand with clothing. Early in a particular fashion "season" new styles are primarily sold at full retail price, since the new style is in higher demand. At the end of the season, if there are inventories left over, the retialer needs ot clear the product, so it gets marked down. Other items go on sale as "loss leaders" to bring in foot traffic to increase overall revenues.

 

Sometimes the 2 concepts are mixed together. Auto manufacturers sell a base model with a relatively small mark-up to draw them into the showroom, then show them how a couple thousand in added features only costs another $30 or so per month.

 

Kind of like going to the BMW dealer looking at a R1200GS... and walking away with a fully loaded RT. You tell your wife... "It's only another $50/mo and we'll be a lot more comfortable". She also thought the blue RT was prettier than the yellow GS.

[Lets_Play_Two]

Are they making money on the individual $20 transaction, or is it a sacrificial sale at cost, to drive more profitable sales?

I would expect that it it's sometimes one, sometimes the other, and possibly influenced by any number of other factors. I doubt that there's any universal answer.

 

They probably sell everything below cost but make up for it with volume....

[Quinn]

Anybody going to bring up "bait and switch" tactics? Maybe the joke about getting boat to go with the tampons?