Do the retail stores make a profit by offering such discount offers? Maybe, yes they are driving the sales more but it should be used effectively or else it will lead to loss.
Let’s analyze the topic of whether the stores are making a profit while offering 50% off or more, or else it is a trap to the customers.
How do stores make money when they offer discounts?
Discount offers are one of the most common and effective ways to increase retail sales and to make the brand more popular. But sometimes the discounts will hurt the business if you incorrectly use the sale strategies.
For example, a few years back one of the famous clothing stores Ann Taylor Loft has offered clothing that comes with a 40% offer. Now, most people will be thinking is there any profit to the company or they just giving their clothes to everyone. This is a part of the plan where the store has used the strategy well. The stores will be buying the goods in bulk, and this would be the plan that has been made in advance while negotiating with the manufacturer.
Most stores will be offering discount offers that will be profitable for the business. As they are not depending on the profit of the individual product but rather depend on the profit of the bulk product.
Consider an example,
A store buys 100 sweaters and the cost is $50
It sells 80 sweaters for the cost of $100
The profit of the store is $3000
The overall expenditure of the store is $5000
But during the holiday season, the store will sell for $40
While offering such discount offers, the store will attract the customer to enter into the store. Once they have entered they will end up buying other things.
This is one of the best strategies followed by the stores. Even though they are selling the product for a lower price but still here they depend on the profit of the overall sale of the product.
Here the store has not faced any loss but it is a break-even. The expenses of the cost will be covered by the profits that have been obtained from the sale of the other items in the store.
Do the retail stores overcharge the customers?
In recent times, we can notice that the e-commerce sale is going well as people started to think that the local retailers are gouging at the customers. So they have moved to e-commerce stores, but the one thing to consider about retail stores rather than covering the cost of raw goods they have other expenses like labor, rent, taxes, insurance, and other hundreds of costs. All these costs will be covered by the amount they are making on the goods they sell.
But the fact is that the retail stores are not gauging at the customers as to when they make 50% discount or more then they can able to cover the cost of any one item.
During any occasional season such as Halloween or Christmas, you would have noticed clothes or other products that come with the discount offer which is 50% or more.
The retail stores offer high offers only to such products that are left-over or the style of the product has changed and such product won’t get sold for a plain price.
Sometimes, have you ever noticed that certain stores will offer product that goes below the 50% discount or more. For example, if you buy a Christmas card after the New Year then you will get a 75% offer.
In the initial stage, the retailers will be selling the product at a high price, but if the item doesn’t sell at those prices then they will mark the price below 40% offer and sell some of them. Even certain items don’t get sold after that also, and then they will mark it down again.
So, when it comes to the 50% or more discount offers, based on the selling price the retailers face either break-even or profit-wise. It also depends on how much the product has been marked up.
Are discounts really bad for business?
If the stores are offering discounts, then it doesn’t always mean that the retail stores are gouging at the customers. Sometimes they also want to develop the customer base, for every kind of sale one needs to find a strategy that will help both their business and the customer.
If you need 50% to cover the cost of your business, and also you need to make a margin profit but you are offering a 40% of discount, then that won’t work in your business.
You are making a piece that costs $1
You are selling the piece for $3
Is it a healthy profit margin or the retailers can able to cover their costs? No, it is not possible as you need to make 35% to 50% of the profit.
So, it would be better if you sell the item for $10
So, you need to have a better understanding in calculating the product price, and while determining the discount offer make sure that it is profitable for both customer and the business.
In most cases, the discount offers that are more than 50% or more would be genuine, as it is specially designed to clear the old or dead stocks. The new stock can be added to the store only if the old stocks have been removed.
So, when it comes to the profit of the stores, most stores don’t get profit for selling of individual items, there will be overall profit. If the sales strategies are well followed, then it will lead to making a profit overall.