Page 7 - Griffenomics

FACT: DURING THE BLACK FRIDAY WEEKEND, 58 BILLION DOLLARS WERE SPENT BY CONSUMERS IN THE US
SPRING ISSUE GRIFFENOMICS
7
WHY DO SHOPS SELL GOODS AT
RIDICULOUSLY LOW PRICES ON
BLACK FRIDAY SALES OR OTHER
BIG SALES?
Black Friday originated from the United
States, it is the Friday following Thanks-
giving Day and marks the beginning of
the Christmas shopping season. On this
day, retailers oƒer promotional sales and
extend opening hours, and this trend has
spread to diƒerent parts of the world in
recent years, including Canada and the
UK. Lowering the price of goods will
most certainly increase the demand for
them. However, on the Black Friday sale
or some other big sales, the discounts
oƒered seem over the top - the selling
price may even be lower than the cost to
produce the good. How are retailers sup-
posed to earn anything, when they are
selling the goods this cheaply?
In fact, this kind of pricing strategy
is based on an economic concept called
“loss leader”, where a product is sold at
a price below cost, to stimulate the sale
of other products. Retailers expect that
when customers are drawn into the store
by hugely discounted goods, they are
likely to be buying other goods too. Ide-
ally, the profit retailers get from selling
these other goods will break even or pos-
sibly exceed the loss incurred in selling
the under-priced goods. Moreover, the
retailer may be able to establish a com-
mercial relationship with their custom-
ers through brand a¢nity and member-
ships, for example.
Another reason for holding sales on
Black Friday relates to price discrimina-
tion. Price discrimination can be thought
of as businesses trying to charge higher
prices to people who are willing to pay
more, while retaining price sensitive cus-
tomers who want to spend as little mon-
ey as possible. Therefore, retailers give
out huge discounts in Black Friday sales,
which is a form of price discrimination.
They acknowledge the fact that relatively
rich customers, who are relatively insen-
sitive to price changes, are less likely to
join the crowds and buy cheap merchan-
dise. However, at the same time, there
will be a huge influx of price sensitive
buyers generating revenue.
FURTHER READING:
‘Freakonomics’
by Steven Levitt and Stephen J. Dubner
‘The Business Book’
by DK Publishing
‘Business Economics’
by Andrew Gillespie
“How are retailers supposed to earn
anything when they are selling the
goods far too cheaply?
SEA OF GOODS
The discounts
frequently found in
supermarkets are
common examples
of loss leaders
Photo courtesy of Wikimedia Commons BUSINESS
DOESN’T
ALWAYS
MAKE
SENSE...
“There are times at which
it is right not to listen
to customers, right to
invest in developing lower
performance products that
promise lower margins,
and right to aggressively
pursue small, rather than
substantial, markets.”
CLAYTON CHRISTENSEN
The Innovator’s Dilemma (1997)
“You read a book from
beginning to end. You run
a business the opposite
way. You start with the
end, and then you do
everything you must to
reach it.”
Harold Geneen
Businessman (1910-97)
“The essence of strategy is
choosing what not to do.”
MICHAEL PORTER
On Competition (1998)
“It’s not the customer’s job
to know what they want.”
Steve JOBS
Businessman (1955-2011)
“In preparing for battle I’ve
always found that plans
are useless, but planning is
essential.”
DWIGHT EISENHOWER
US President from 1953-1961
“Show competitors what
you are doing. They will
learn soon enough anyway.
Just don’t tell them what
you are thinking.”
Bill hewlett
Founder of HP (1913-2001)