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Discounts at many stores are 1 part real price cutting, 3 parts BS

Posted By Claes Bell On 12/01/2013 @ 8:30 am In Shopping | 5 Comments

There’s something deeply satisfying about getting a good deal that goes beyond the actual amount of money you saved.

Walking out of a department store having saved 60 percent thanks to coupons and a big sale may make people happy, but most of it is B.S.

Don’t believe me? The proof is in the pudding: While discounts have increased substantially over the past few years, the actual profit margins of retailers haven’t changed at all, according to stats cited by the Wall Street Journal in a recent article [3] about the illusory nature of many Black Friday deals [4].

The number of deals offered by 31 major department store and apparel retailers increased 63% between 2009 to 2012, and the average discount jumped to 36% from 25%, according to Savings.com, a website that tracks online coupons.

Over the same period, the gross margins of the same retailers — the difference between what they paid for goods and the price at which they sold the — were flat at 27.9%, according to FactSet. The holidays barely made a dent, with margins dipping to 27.8% in the fourth quarter of 2012 from 28% in the third quarter of that year.

In the end, discounting is a zero-sum game: if retailers make a fatter margin, it means consumers paid more. So how is it possible that discounts have increased while margins have stayed the same? Retailers use a couple of tricks to make “deals” look better than they actually are. One is inflating the “original price” enough that when a retailer charges what they were planning to anyway, they can put up a sign saying that you’re saving “10 percent.” The other is signing deals with suppliers to offer exclusive merchandise that’s hard to compare across retailers. For instance, if Kenneth Cole makes a shirt that’s only available at Macy’s, then that makes it hard to see whether it’s a good deal because no one else is selling that exact item. Companies will also start their own in-house brands to create a similar effect.

What’s funny is that when retailers try to cut all this monkey business out and make prices more transparent, customers get really mad. As the Journal article points out, when J.C. Penney Co. tried to stop discounting and just offer stuff at lower prices every day, the company’s business took a huge hit, and it’s gone back to inflating its original prices and “discounting” deeply.

So why do people love B.S. discounts? For some, it probably comes down to gullibility. They take the “50 PERCENT OFF!!!” signs at face value and assume they’re getting a great deal based on a number that really means very little.

But I think most people are savvy enough to pick up on the fact that they’re being had. For them, those happy feelings from discounting are a form of self-deception. As long as the discounts look good enough, they can go on buying the things they wanted to anyway and justify it by saying that they’re getting “a great deal” that may very well disappear tomorrow. I’m not going to lie and say I’m immune to that sort of thinking — I definitely am more likely to buy an item on Amazon if it’s listed as 70 percent off versus 30 percent off, even knowing full well the “list price” is probably smoke and mirrors.

A greater numeracy — understanding enough math to get that “percent off” only makes sense in the context of what number you started with — can help with that first thing. But the self-deception part — well I haven’t completely figured that one out myself. It’s very possible to “great deal” yourself into debt, overspending and even bankruptcy.

So what do you think? Do you pay attention to “percent off”? How do you tell if you’re getting a “good deal”?

(Photo: Daniel X. O’Neil)


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/price-cuts-stores-part-real-discounts-part-bs.html

[3] a recent article: http://online.wsj.com/news/articles/SB10001424052702304281004579217863262940166

[4] Black Friday deals: http://www.bargaineering.com/articles/avoid-victim-black-friday-shopping.html

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