I often hear that consumers choose major retailers over smaller local businesses because they think larger retailers provide better value. While that can be true, there are some critical realities about spending at major retailers that many consumers are not aware of. Having spent nearly a decade working behind the scenes with some of the biggest US retailers, here are 3 things I always keep in mind as a consumer:
1) Promotions are planned: When you see a great sale happening at your favorite store, it can feel like your lucky day. Here is the truth though: most promotions are planned up to a year ahead of time. Products are priced to allow for compelling sale prices. So, while comparing the original ticket to the out-the-door price might seem like a steal, you are likely paying exactly what the product was intended to sell for.
2) The bigger the discount, the bigger the margins: Getting a huge discount can be exhilarating, but it is rare for a business to sell something below cost. What a big discount really means is that the product was significantly marked-up to being with. In other words, the non-discounted price reflects large store profits against relatively low-cost goods. So, while discounts may appear as a gesture of goodwill from retailers to their customers, discounts are actually a common tactic intended to attract customers and manufacture satisfaction while still driving big profits.
3) Loss leaders: There is an exception to every rule, and loss leaders are a perfect example of that. Loss leaders are products that are intentionally priced below cost to enhance perceived value of the overall assortment and bring in customers. Many of us are familiar with the foot-in-the-door phenomenon—in other words buying one small thing makes us much more likely to buy additional items. Anyone who has been to a big-box retailer knows what it is like to go in for one thing and walk out with twenty. Loss leaders are carefully selected to motivate that first purchase.
Loss leaders are also a way big retailers enhance perceived value. By highlighting several exceptionally priced items, retailers establish a value proposition that may not extend to their whole assortment. So, as you continue to shop, your purchase threshold comes down because you 1) have already decided to spend money, and 2) you perceive the overall value is better than it is because of these specially priced items.
What does this mean for you as a consumer?
1) Don’t rush to buy: Promotional pricing is often intended to drive urgency. For non-seasonal goods, most sale pricing will occur at least once a quarter (every 3 months). If you have your eye on something expensive and you aren’t ready to splurge, keep in mind that you will likely get another chance to buy at that price or better.
2) Focus on the out-the-door price: The best way to make sure you are getting good value is to know what you are spending, rather than what you are saving. What you are spending is a quantifiable fact, whereas what you are saving is a number that can be readily manipulated by the retailer. Avoid this pitfall by comparing the final price to other stores selling the same or similar goods, and more importantly, consider what the item is worth to you. The pricing is built to be appealing, so this extra step helps ensure you don’t fall victim to cunning sales tactics.
3) Stay alert: Loss leaders are highly tactical measures created to get you in the door and spending any amount of money, but they wouldn’t exist if they didn’t ultimately drive profit. If you shop at a particular store because of great prices on certain goods, make sure you are also staying alert to the other items in your basket. Those other items are likely making up the difference in profit margin that the store has forfeited in their loss leaders. While convenience is a commodity in and of itself, stay aware of why you choose certain retailers over others and if those factors are to your advantage when you look at the big picture.
While it is true that major retailers are generally able to undercut local sellers due to sheer sales volume and resources, they also rely on strategic positioning to increase consumer spending. To be a truly savvy consumer means not being rushed or dazzled by the messaging. It involves critically evaluating not only the prices offered by major retailers but also understanding the nuances of their strategic positioning. By taking the time to consider some of these common tactics, you can make informed choices that align with your preferences and values.