You have probably heard a lot of “Black Friday” or “Cyber Monday” sales promotions lately. This is the time of the year where stores slash their prices by leaps and bounds, and people go crazy about it. Are you?
Chances are, either you’re totally excited about the prospect of saving a lot of money for the holiday gift-giving season, or you’re totally annoyed by the fact that if these retailers can sell at such a low price, then why can’t they do the same thing for the rest of the year? That is a perfectly legitimate question, and it is not difficult to feel that there’s some big corporate gimmick going on.
However, the reason for this sales promo phenomenon need not necessarily stem from hideous and despicable business motives. Instead, this kind of marketing scheme or pattern arises from what is technically called the “economics of scale”.
Remember that any businesses are primarily concerned with only two things: operating costs and sales revenues. The difference of these two, which is called profit, is that which decides whether a business will thrive or it will go down the drain.
Let’s first understand the two phases of commodity pricing: breaking even and making a profit. Afterwards, let’s talk about how Black Friday and Cyber Monday distorts the whole theory.
Operating costs entail more than just the cost of the goods sold. More often than not, a sizeable (and the financially most painful) chunk of the figure is made up of employee wages, utility bills and miscellaneous expenses. Hence, a business owner put these items into account whenever they compute for the selling price of their goods.
For example, Macy’s bought cardigans from a local supplier at a hundred dollars each. However, Macy’s understands that their capital for the cardigans is more than just a hundred dollars. The cost of transporting the cardigans, the cost of putting them on display and also the costs that were mentioned in the previous paragraph, will also be considered.
Hence, the longer it takes for Macy’s to put an item on display, the more expensive the item becomes for the retail customer like you– even if it’s the same item all along.
Suppose that the auxiliary costs of running a store is $ 3000 each day, regardless of how many cardigans will be sold. Furthermore, on a typical no-occasion business day, suppose Macy’s sells only 20 pieces.
Thus, Macy’s would have to spread the $ 3000 among the 20 cardigans, which will then raise the minimum selling price to $ 250 dollars ($ 100 initial capital plus $ 150 for auxiliary costs). That is, Macy’s will need to sell each cardigan for at least $ 250 dollars so that the company will not go bankrupt.
Making a Profit
After a business establishment determined the auxiliary costs associated with selling a particular product, they will not estimate how much they need to earn so that their stakeholders will be satisfied. These stakeholders include the business owners or the stockholders of the firm, should the company be publicly traded.
Hence, going back to the same cardigans, suppose Macy’s will put $ 50 dollars on top of the $ 250 minimum selling price, making the final selling price $ 300. With this amount, Macy’s will be able to make its business survive by covering all costs and satisfying its shareholders.
Black Friday and Cyber Monday
Now, the whole story gets twisted whenever special events like Black Friday and Cyber Monday, where everyone in the country goes onto a spending spree. This means that instead of being able to sell only 20 cardigans, Macy’s can expect to sell much more than just that. In theory, Macy’s would not have to lower their prices at all. After all, who doesn’t want to exceed profit targets?
However, competitors like Saks Fifth Avenue and even Target forces Macy’s to lower their prices by minimizing their profit margin.
Suppose that instead of just 20 cardigans, Macy’s expects to sell 50 cardigans in those two days. Thus, 50 instead of 20 will now divide the $ 3000 auxiliary cost, which turns the minimum price to $ 160 ($ 100 cardigan plus $ 60 for auxiliary costs). Adding the $ 50 margin, Macy can now sell the each cardigan at $ 210 instead of $ 300, effectively giving its Black Friday and Cyber Monday customers a major discount.
And that 30 percent price reduction is what they call a discount, and what we call awesome.
Hence, it isn’t really a marketing ploy. Instead, it’s simple and direct application of business mathematics.
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