Winning with Loss Leaders
By Tom Ryan
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