Social Question

mazingerz88's avatar

How does a company make money despite selling with discounts?

Asked by mazingerz88 (18419 points ) May 17th, 2014

A girlfriend of mine buys a clothing item once a week because she just can’t say no to the 40% or 50% discount. Told her I have a feeling they mark up the price high in the first place so when they lower it big time, they still get a lot of profit. Not really sure if i’m right.

What could be the different ways a company uses discounts to its advantage-? Is giving discounts a “farce” to lure in buyers-?

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21 Answers

gailcalled's avatar

Check out the company’s annual or quarterly report if it is publicly owned. That will give you its financial bona fides, such as gross and net profit and costs.

Crazydawg's avatar

Your gut feeling is more correct in that stores will start with a really high price and discount it 70% or more to make it appear a super deal when in reality you are paying full price considering costs and overhead.

bolwerk's avatar

The markup on clothes even at a low-end retailer is probably easily 300% or much more. If they bought an item at wholesale for $5 and marked it up to $15 and then discounted half of that they’re still make $2.50 profit on the item.

Clothing stores seem to do heavy discounting to circulate inventory, among other reasons.

ragingloli's avatar

Calculating the prices, so that they still make profit after the discount.
People coming back after they bought something discounted, and buy something at full price.

Darth_Algar's avatar

There’s also the fact that stores often use discounted items as loss leaders. In other words they may take a small loss on that particular item in order to lure people into the store where they will then purchase other, non-discounted items. Of course this doesn’t work on an individual level if a person only buys the discounted item and nothing else, but the idea is that enough people will come in for that discount then buy enough other stuff to make it profitable overall. Obviously this works, as it’s been a pretty common practice for decades.

stanleybmanly's avatar

It’s all a racket. If you want to really understand, take a look at Joseph A Banks which blares on endlessly about their relentless avalanche of nonstop “sales” where the regularly priced $75 pajamas and $24 boxer shorts are slashed an “unbelievable” 75%. It’s shameless and silly hype, but it must apparently work.

Lightlyseared's avatar

It costs money to store stock. After a certain point it could be cheaper to sell at a loss than hold on to the stuff.

non_omnis_moriar's avatar

When I was very young I had a summer job at a Appliance and Electronics store. It was family owned but they wanted a big look like a Circuit Shitty type and it drew a lot of customers.

About a week before a big sale, we were ordered to rewrite all the tickets.

They were written by hand back then.

So we pulled a ticket for a stove that was $349.99 and raised the price to $399.99 for example. Then the big sale would appear in the newspapers.

That same stove would be ticketed again, with Big RED SALE TAG for the price of say $379.99 or sometimes just $349.99 (the regular price).

It never failed. And crowds filled the store on weekends and the store sold tons of stuff that way.

In addition, the salespeople were punished if they didn’t sell and added extended warranty which was almost pure profit since people forgot they had them or lost them.

Kropotkin's avatar

Mark-ups are in the hundreds and sometimes 1000% or more. Retail is basically a scam. I’m sure there’s a more rational way for society to distribute commodities and products than this capitalist parasitism.

non_omnis_moriar's avatar

I don’t know what is marked up 1000% or more.

Back when I was working in retail – before globalization – they would mark up a stove between 25% and 35%, the latter being a lot.

Kropotkin's avatar

@non_omnis_moriar That must have been a long long time ago!

non_omnis_moriar's avatar

Kropotkin 80’s thru’ 90’s. Everybody always claimed that markups were hugely bigger than they were in reality. Always.

ragingloli's avatar

Depends on the product.
You can not dial up the price on an already fairly expensive stove too much before a potential customer flips you the bird.
Clothes on the other hand, which are made by cheap slave labour in Bangladesh with cheap materials, only cost a few € to make, and from a 10€ item to a 100€ item, I doubt the actual production costs increase at the same rate.

Haleth's avatar

They can also get their wholesale costs down through the economics of scale (buy a ton of crap, get a big discount) or other purchasing tricks. Like, wholesalers often want to get rid of extra stuff at the end of the fiscal year, and they’ll offer deep discounts then. Or if you agree to feature their product in the best spot in your store, they’ll give you a special discount to sweeten the deal. Etc.

Stores can also add to the perceived value of the stuff they sell by creating a nice-looking atmosphere. Like, if you go to a little boutique store that is softly lit, with cherry wood floors and nice displays, that’s neatly organized, airy and spacious, you feel good about shopping there. Subconsciously, all the stuff in there seems to be more worth it, because they are taking such nice care of everything. It makes it seem like the things inside must be nice. So maybe you buy a shirt there for $50.

If you saw the exact same shirt in a crowded, disorganized warehouse-type store, it wouldn’t seem like a $50 shirt. The atmosphere above makes it easy to shop and to imagine yourself owning the shirt (or whatever.) It’s just like staging a house. It seems more plausible for the “regular” price to be high, even if they have no intention of selling it at that price.

downtide's avatar

They do sell items at inflated prices to begin with but retailers often mark things down as a “loss leader”. That one item may be sold at a loss but enough people buy anothe full price item with it, to make it profitable. Also clothing discounts are usually end-of-season. They need to clear out the stockroom to make room for new products. And some items just dont seem to sell well in certain stores. So they mark them down because its better to sell at a loss than destroy them.

Kropotkin's avatar

@non_omnis_moriar Well, markups vary a lot. When I say some things are 1000% or more, I’m not making it up. These items are things like bottled water and cinema popcorn. Groceries are at a more “reasonable” 50–100%. Clothing can be 200% or more. Jewellery can be in the hundreds. Brand name drugs can be in the thousands.

You worked in retail selling stoves. Well, appliances just happen to have one of the lowest markups around. So what you think is the norm—is not.

Often things labelled “exclusive”, “luxury” (and “organic” for groceries) are differentiated by their price and given a higher markup, because there’s a target market of consumers who are willing to pay more just because they can, and think they’re getting a better product (when it’s often essentially identical to something cheaper).

bolwerk's avatar

Communist @Kropotkin knows more about retail than the capitalists. Even if he wants us to buy everything from a party-run store.

ragingloli's avatar

Capitalist @bolwerk has not a sliver of an idea what communism is.

bolwerk's avatar

@ragingloli: um? Where did that non-sequitur come from?

ragingloli's avatar

@bolwerk
The same place yours came from.

bolwerk's avatar

@ragingloli: If you think my comment was a non-sequitur, it’s you has no idea what communism is. Peter Kropotkin was an anarcho-communist. I believe @Kropotkin is too.

My political ideology probably has less in common with capitalism than most forms of communism, certainly the non-anarcho varieties.

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