An article in SmartMoney explains how retailers make money on 50-percent-off deals and offers some tips for consumers looking to capitalize on the best of them.
Adrienne Tennant, an analyst at Janney Montgomery Scott, told the consumer magazine that the steep-yet-temporary markdowns are essentially loss leaders designed to bring customers in. The hope is that they'll buy more full-price items during the visit but many are also designed to drive multiple visits during a shopping period.
"[Consumers] have traditionally been quite motivated by sales because we understand that means 'Here today and gone tomorrow,'" Kit Yarrow, a professor of psychology and marketing at Golden Gate University in San Francisco, told SmartMoney.
The article states that retailers shouldn't mark up sales before applying the discount because consumers readily figure that out. But it offered three ways retailers are able to drive traffic yet maintain margins on these deals:
Sales-Cycle Lows: Stores rotate what categories and brands go on sale each week, leaving other core items at full-price. The extent of each discount changes over the course of a month, as well.
Limited-Time Deals: Retailers limit the time for when items are on sale with the hope that a rush of shoppers will also likely buy full-price offers. Macy's "one-day sales" offer steeper discounts until 11:00 a.m. and then lesser savings for the rest of the day. The Gap also limits some of its 40 percent off sales to single days. Prof. Yarrow said this provides a strong psychological incentive for consumers. He said, "That fear of missing out is giant in the minds of consumers."
Shipping Charges: At least online, shipping charges can be used to help offset the deal being offered.
To best capitalize on the deals, SmartMoney advises consumers to regularly check circulars for promotional patterns, verify the timing of discounts, check shipping fees, and quickly snap up the good deals.
"If the price is already 50 percent off, take it and take it now," said Jeff Green, who runs a retail consulting firm.
Discussion Questions: When are loss leaders effective and when are they fairly ineffective? What other steps ensure stores are not losing margin dollars across the store?