Friday, October 23, 2015

Retail Discounting The Modern Way

When I was in retail some years ago, profit margins were not that generous so you didn't have to reduce the price that much before you were losing money on that item. Goods were sourced from Western nations with high wages so that limited how much of a markup you could add.

Now things are different. Globalisation means buying from low wage countries. The importer brings in goods at a ridiculously low price but then adds a whopping margin. Then when goods are discounted, good profit can still be made. Let's look at some modern techniques of selling more, gaining plenty of profit and making the customer think he/she got a bargain.

The 'buy one get the second one half price'.

If an item costs $10 to get into the country and then it costs the shop say $25, it is sold for retail $100. They get a 300% mark up. The shop could offer the second item at half price and the customer gleefully pays just $150 for two of them. The store paid $50 for both items so the margin drops to 200%.

The reality: Did the customer really want two of them? Sometimes no. Had the store simply ran a standard 25% discount and the customer bought one for a $75 purchase, the retailer still made 200% margin, but sold just one. With the discount, profit then was halved from $100 to $50. So more goods are sold and therefore more profit is made by the 'buy one get the other half price' deal. No wonder such offers are popular for reatilers.

The 'buy one get another free' TV advertisement.

There has to be an enormous mark up to make this work. They decide to sell it on the TV instead of retailing it. It costs $10 to import and the retail price is inflated to $150 and a second is offered free. The customer gleefully pays just $150 for two of them. The import price is a total of $20 for two so the margin is 650%.

The reality: As the purchaser pays for p&p, then there is only the TV advertising cost to add on. If the goods are returned for a refund, then the purchaser still pays the p&p to return it. Few can be bothered with that anyway, so the sale is a pretty sure bet. The price is way beyond what it cost and the seller is in clover.

Summary: Globalisation is really good. The poor worker far away is on $2 per day. The customer pays pretty much what it would be sold at if made locally. The customer ends up with two of something they in most cases only wanted one of. The margins for the business goes through the roof. It seems commerce is the winner, the only winner.

PS. The figures used here are indictative only. The point is how these systems work and whether they are in your best interest to use such schemes. Only you can decide that.

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