The Wall Street Journal examines how retailers have carefully incorporated the “deep discounts” of Black Friday into their profit margins, which makes a lot of sense from a business perspective, but it’s still interesting to have it said so plainly:
Here’s how it works, according to one industry consultant describing an actual sweater sold at a major retailer. A supplier sells the sweater to a retailer for roughly $14.50. The suggested retail price is $50, which gives the retailer a roughly 70% markup. A few sweaters sell at that price, but more sell at the first markdown of $44.99, and the bulk sell at the final discount price of $21.99. That produces an average unit retail price of $28 and gives the store about a 45% gross margin on the product.
Retailers didn’t always price this way. It used to be that most items were sold at full price, with a limited number of sales to clear unsold inventory. That began to change in the 1970s and 1980s, when a rash of store openings intensified competition and forced retailers to look for new ways to stand out.
Basically, retailers already know that only a handful of people will buy a sweater at its $68 price point, and that the bulk of its sales will be when the sweater gets sold for 40 percent off. The discount is already “priced into the product.” Shoppers get excited about the deals that they believe they’re receiving, while retailers get the profit margin they already expect. Of course, none of us care how the discounts are engineered—we just care that there are discounts in the first place. It’s consumer psychology.