Why are consumers so addicted to sale-pricing? Maybe addicted is the wrong word. It’s actually more of an involvement- an emotional involvement as the customer thinks that they are getting a ‘deal’ – somehow making them, the customer, special, and the product more desirable.
The facade of sales and discounts – especially with large retailers- is hyper-planned, hyper-strategized, and not actually a ‘deal’ for the customer in the classic sense. I described it in small-batch-manufacturing as primarily a psychological device. The cost, markup, and sale price were pre-determined by the manufacturer, with the intent that most of the product would be sold at a ‘discount.’ The discount, obviously, is no more than a market positioning. The discount price is the real retail price. The full-price is not.
DISCOUNTS WORK BETTER THAN THE TRUTH
JC Penney has been in the news a lot this week because it’s been perhaps the largest scale experiment on this issue- how involved customers get in coupon clipping (nytimes). The company has famously seen it’s sales drop 25% in a year- i.e. several billion dollars- because of a new CEO’s plan to reposition the brand as low-pricing everyday. Meaning- “JCP sells cheap products.” Before the new CEO came on board, JC Penney sold products that coupon-clipping customers could get at deep discounts if they behaved in a deeply involved way.
Here’s an older Bloomberg article that describes JC Penney’s strategy of “everyday low prices” – and how it’s not working. It’s not working because the comparison of “seen elsewhere for $xx” is a comparison to the posted retail price elsewhere, not the sale price that the product will eventually move at elsewhere.
Attempting to reposition any of the big retail outlets as not-discount-oriented seems fruitless, because the psychology of sale price is so extraordinarily effective. A $20 shirt at JCP seems cheap, while a $50 shirt at Gap at 60% off seems like a bargain— even though they are the SAME THING.
You can see sale price as simply a means to get a customer more invested in the retail experience. Even if you explain to a person all these things- how retail margins are built- they still are more likely to buy something listed as on sale because of the perceived value. (see Fab, Gilt, Everlane, etc.)
I’ve understood retail and wholesale margins well for a long time- and so I ask myself- does seeing something on sale affect my willingness to buy it?
Not as directly, I believe. I rarely buy clothing (only sweaters and socks.) I do buy shoes. I also hardly ever buy on impulse, and, like for most people in this profession, “shopping” is work- it’s analyzing and assessing. When Daniel and I go to nyc, we plan two eight hour days of shopping- never buying anything- just seeing the market and paying close attention.
Generally speaking, if I set out to buy something, I’ve planned how much I’m willing to spend for it beforehand. Shoes are a good example: I don’t actually want cheap shoes, because they are a waste and will wear out. I want shoes that are made in Europe or the US, of natural fibers, and I know that these can’t be had for too cheap (unless one literally finds a local store liquidating.) And so, I’ve mentally predetermined what the right price is for what I want, and usually find something within 10% of that price- whether it’s on sale or not.
And so we come to fast-fashion. H&M, Zara, etc. By definition, fast-fashion can’t be anything but a drain on environmental resources. It’s the gas-guzzling SUV equivalent of the clothing world.
Because think about it: let’s say you buy a $1200 button-up shirt from Chanel. You are going to take care of that piece, wash it in a preserving way, and not throw it out.
But it takes the same amount of cotton- i.e. the same environmental resources – the make the $12 button up shirt at H&M. Because of the price & quality, the H&M shirt is designed to be thrown out.
But this isn’t about designer fashion, which really is unaffordable for most people. It’s about overconsumption. Rather than buy 10 cheap shirts buy one decent one. The environmental impact is probably better than 10 times less. Or, as a friend of mine does- only buy vintage clothing. (She buys underwear new!)
ONLINE VS RETAIL MARGIN
Standard or best-practices margin is not the same across industries: For retail clothing it hovers between 50% and 60% (as relates to wholesale price, not COGS.) What many direct-to-end-customer companies are trying to do is combine the wholesale and retail margin.
- -As we’re using the term, margin, or gross margin, mean the same thing: revenues less cost of goods sold.
- -The retailer’s COGS is the price at which they buy the products – the wholesale price.
- -The manufacturer’s cogs is the cost of producing the product on a per product basis. Manufacturer’s cogs do not include non-recoverable engineering, administrative, etc. It usually just includes cost of materials, cost of labor, plus a margin from the contracter if the manufacturer does not own their own production.
Here’s a list of margin across various industries– both clothing manufacturing and clothing stores are itemized- with lower margins than I’m seeing as now standard across middle- upper price point clothing stores.
A new york times article about companies who only plan to sell direct offers a surprising lesson near the end of the piece: even those extra savvy companies who have built their entire business model around selling direct are seeking out retail partners to “add gravitas.” (some more related articles: everlane, julep, bonobos. )
So when I see a company like everlane marketing their model as the best concept iteration since sliced bread, I think it’s funny. It’s a direct-to-consumer model with no retail component. It’s not even vertical- because they don’t own production. They hardly invented this idea! But they have been doing a very good job explaining to it customers.
So what have I learned by writing this? Customers want an experience when they shop. They want to be involved, even if the reasons the retailer gives for involvement are fluff or bs. Sale price is an extraordinarily effective way of involving customers. Another method that is being experimented with currently is transparency. It’s yet to be seen if this holds the consistent appeal that sales and discounts do (I’d bet it doesn’t.)
Right along with discounts, novelty is an important tool, as seen in fast-fashion. It’s new, and it’s accessible, it’s just really eco-UN-friendly.
Consumption and overconsumption are deeply part of our culture. Something that I will write about again later.
What do you think? What psychological strategies do retailers use that are effective?