Reply
 
Thread Tools Display Modes
  #1  
Old 12-09-2018, 12:21 AM
Asuka Asuka is offline
Guest
 
Join Date: Feb 2016
Posts: 974
What's the point of "Buy One Get One for a Penny/Nickel/Dime/Dollar" sales?

Basically any "Buy One Get One Free" style sale where instead of getting the second free you basically get the second for 99% off. (Note this only applies for getting stuff at 99% off, buy a burger get a second for a dollar doesn't count but I'm including the dollar example for when you see sales of "Buy a $60 game and get the second for $1")

Is there any real advantage in not just making the second free? Is there some weird tax thing going on? Does it somehow look better on the books if you make 1% more sales over a normal free promotion?
  #2  
Old 12-09-2018, 12:48 AM
lingyi lingyi is offline
Guest
 
Join Date: Mar 2017
Posts: 1,339
I'm sure it's a tax break angle. If they give it away, it's a gift, but if they sell it for a penny, they can write off a certain amount as a loss.
  #3  
Old 12-09-2018, 12:55 AM
OldGuy OldGuy is online now
Charter Member
 
Join Date: Dec 2002
Location: Very east of Foggybog, WI
Posts: 5,111
Quote:
Originally Posted by lingyi View Post
I'm sure it's a tax break angle. If they give it away, it's a gift, but if they sell it for a penny, they can write off a certain amount as a loss.
No they're not making a gift of it, you need to purchase the other one to get it. It would be no different than a two for the price of one sale. I've also seen buy two get three free sales in the past year or so on Coke products. Those are not cost basis is just divided between them.
  #4  
Old 12-09-2018, 06:06 AM
nicky nicky is offline
Guest
 
Join Date: Apr 2002
Posts: 564
No i think it’s legal and admin reasons.

If you’ve sold a thing for 1c it’s absolutely definitely a “sale” and all the legal mechanisms for buyers and sellers kick in.

Plus a “sale” of 0.00 might have admin and IT issues
  #5  
Old 12-09-2018, 06:31 AM
septimus's Avatar
septimus septimus is online now
Guest
 
Join Date: Dec 2009
Location: The Land of Smiles
Posts: 18,143
Perhaps I'm way off-base, but some marketing models are based on appealing to price-conscious customers while exploiting less-informed customers.

If a customer purchases a 'Buy One Get One Free' item but brings only a single item to the cashier, there's a moral obligation to give the customer his free item. But if it's a 'Second Item for Only 10 cents' they can argue "We figured you only needed one and wanted to save the 10 cents"!
  #6  
Old 12-09-2018, 08:19 AM
Chronos's Avatar
Chronos Chronos is offline
Charter Member
Moderator
 
Join Date: Jan 2000
Location: The Land of Cleves
Posts: 80,841
It might also just be a way to make the sale look different from all of the BOGOF sales out there, and hence more memorable, and hence more effective as marketing.
  #7  
Old 12-09-2018, 08:22 AM
Filbert Filbert is offline
Guest
 
Join Date: Dec 2010
Posts: 5,087
A guess from working retail and observing customer behaviour: some people will only want one, but if it's BOGOF, then almost everyone will take the second, even if they really don't want it. Add even a minuscule charge and a significant number of customers will turn it down.

Those who think it's a great deal will still think it's a great deal as it's only a token more, but it saves wasting stock on those who don't care, who are likely to give the unwanted one away to someone who now won't come in and buy one (and get tempted by something else).
  #8  
Old 12-09-2018, 08:49 AM
Schnitte Schnitte is offline
Guest
 
Join Date: Feb 2001
Location: Frankfurt, Germany
Posts: 3,520
Quote:
Originally Posted by nicky View Post
If you’ve sold a thing for 1c it’s absolutely definitely a “sale” and all the legal mechanisms for buyers and sellers kick in.
If that were the reason, then I'd presume it would be more beneficial for the seller to give the second item away for free. Many jurisdictions are more generous, when it comes to liability under private law, to donors of a free gift than they are to sellers of an item under a contract of sale.

My feeling is (but I admit I have no insight knowledge) that it's simply a psychological tactic for promotional purposes. Under a "buy one get one free" scheme, most people realise that they're not actually getting the second item for free; they're simply buying two items, at a price which is ostensibly the price of one but really calculated to cover two items, and the option to buy really just one is not offered. Under a "buy one get the second for a penny" offer, you have the feeling that you have the option to buy one if you want to do so, but that this purchase also gets you the opportunity for a unique bargain which you should not miss.
__________________
"The banana has certain characteristics, appearance, taste, softness, seedlessness, easy handling, a constant level of production which enable it to satisfy the constant needs of an important section of the population consisting of the very young, the old and the sick."
  #9  
Old 12-09-2018, 08:52 AM
kayaker's Avatar
kayaker kayaker is offline
Member
 
Join Date: Jul 2009
Location: Western Pennsylvania
Posts: 30,467
In Pennsylavania a liquor license holder can not give away alcohol. Places that offer "buy six beers and get the seventh for a penny" are staying on the right side of the law. A friend who owns a bar was fined when his manager posted a Facebook update that read "buy six and the seventh is free".

For their customer appreciation party, Bells Brewing provided Two Hearted to the bar for free. Customers were charged a dime for a pint glass to keep it legal. Being a smartass, I walked in waving a roll of dimes.
  #10  
Old 12-09-2018, 09:31 AM
Jonathan Chance Jonathan Chance is offline
Domo Arigato Mister Moderato
Moderator
 
Join Date: Apr 2000
Location: On the run with Kilroy
Posts: 22,073
The important information here is to know that if someone is selling something at BOGOF, the store's true cost of the item is less than 50% of the asking price.

There can be times where selling something at a loss makes economic sense, yes. But it's not the way to bet in most cases.
  #11  
Old 12-09-2018, 10:59 AM
Doug K. Doug K. is offline
Guest
 
Join Date: Jul 1999
Location: Hutchinson, KS
Posts: 3,800
Quote:
Originally Posted by Jonathan Chance View Post
The important information here is to know that if someone is selling something at BOGOF, the store's true cost of the item is less than 50% of the asking price.

There can be times where selling something at a loss makes economic sense, yes. But it's not the way to bet in most cases.
I've worked in the back room in retail enough to know that the cost of the item is at most 50% of the original asking price except on big ticket items. And the cheaper the item is, the higher the markup as a percentage. When I put a $250 price tag on a television (this was in the 80s), the wholesale would be about $125. But a dress with a cost of $7.00 would initially get a $30-$40 price tag. But depending on how well they sold they could get marked down enough times that the last few remainders sold for less than cost.

It's overhead that brings the net profit levels down to the 3-4% you sometimes read about.
  #12  
Old 12-09-2018, 11:53 AM
Jonathan Chance Jonathan Chance is offline
Domo Arigato Mister Moderato
Moderator
 
Join Date: Apr 2000
Location: On the run with Kilroy
Posts: 22,073
Indeed. That's why I used the phrase 'true cost' instead of 'cost'. There are a lot of factors in that. Even selling items below 'cost' there's a tax write down and opportunity cost of having the item taking up storage and shelf space. So yeah, we agree.
  #13  
Old 12-09-2018, 12:34 PM
Philster Philster is offline
Guest
 
Join Date: Aug 2000
Location: Location: Location:
Posts: 10,590
Invariably, no matter how low the cost of the second non-free item, some consumers will not buy that second item. Buy one at 5 dollars and get one free (BUY ONE; GET ONE FREE!) = you move two items for say 5 dollars.

What we know is that even at extremely low values for the second item, a % of people won't buy that second item. Moving more inventory, boosting demand, making more than giving away second item, less price jockeying = don't give away the second item.... yet.

Depending on the product and the time to expiration/loss, it is often best to start with a Buy One and get a second one for some very, very low price first and resort to Buy One Get One Free as the final move.

.

Last edited by Philster; 12-09-2018 at 12:36 PM.
  #14  
Old 12-09-2018, 01:54 PM
lingyi lingyi is offline
Guest
 
Join Date: Mar 2017
Posts: 1,339
Quote:
Originally Posted by Doug K. View Post
I've worked in the back room in retail enough to know that the cost of the item is at most 50% of the original asking price except on big ticket items. And the cheaper the item is, the higher the markup as a percentage. When I put a $250 price tag on a television (this was in the 80s), the wholesale would be about $125. But a dress with a cost of $7.00 would initially get a $30-$40 price tag. But depending on how well they sold they could get marked down enough times that the last few remainders sold for less than cost.

It's overhead that brings the net profit levels down to the 3-4% you sometimes read about.
Markup varies greatly by item. The markup on electronics and groceries are very small, often in the single digits. Compare the prices at Costco whose pricing model is no more than 15% markup (on their huge volume purchases) on what they sell against retail stores and the prices are usually really close.

With few exceptions like clothing prices which are based on seasonal and fashion trends, there's too much competition, especially from online sources for stores to maintain artificially high markups. This is why when you buy a new electronic item, everyone in the store pushes you to by add-ons like cables and extended warranties, because these are point of purchase impulse buys that people typically won't shop around for.
  #15  
Old 12-09-2018, 02:13 PM
mbh mbh is online now
Charter Member
 
Join Date: Jul 2000
Posts: 4,302
A few years ago, one of the big retailers (Montgomery Ward, perhaps?) changed their pricing policy. Instead of putting one department on sale every week, they would have lower prices on everything, all the time.

It was a dismal failure.

People don't want to pay $100 for a $100 item. They want a $200 item that's "on sale for a 50% off". They would rather have the illusion of a grand bargain than the reality of a fair price. They want the illusion that their stuff is worth more than it really is.
  #16  
Old 12-09-2018, 02:41 PM
CookingWithGas's Avatar
CookingWithGas CookingWithGas is offline
Charter Member
 
Join Date: Mar 1999
Location: Tysons Corner, VA, USA
Posts: 12,768
Quote:
Originally Posted by Chronos View Post
It might also just be a way to make the sale look different from all of the BOGOF sales out there, and hence more memorable, and hence more effective as marketing.
That is really all there is to it. The accounting and tax implications are not an issue for a BOGOF sale. It's not accounted for as a gift. The exception would be alcohol sales, which in some jurisdictions cannot be free, as noted by kayaker. I was at my regular hangout bar in 1984 when a local radio station wanted to have a Free Beer Friday to promote the station, but they found out it couldn't be free. So they charged 1 cent per beer. The place was an absolute madhouse. One asshole gave a waitress a nickel and wanted change.

Quote:
Originally Posted by mbh View Post
A few years ago, one of the big retailers (Montgomery Ward, perhaps?) changed their pricing policy. Instead of putting one department on sale every week, they would have lower prices on everything, all the time.

It was a dismal failure.
JC Penney's. Proof that consumers are easily manipulated by fake sales.
__________________
Making the world a better place one fret at a time.
| | |·| |·| |·| |·| | |:| | |·| |·|
  #17  
Old 12-09-2018, 02:54 PM
DrDeth DrDeth is offline
Charter Member
 
Join Date: Mar 2001
Location: San Jose
Posts: 38,672
Quote:
Originally Posted by mbh View Post
A few years ago, one of the big retailers (Montgomery Ward, perhaps?) changed their pricing policy. Instead of putting one department on sale every week, they would have lower prices on everything, all the time.

It was a dismal failure.

People don't want to pay $100 for a $100 item. They want a $200 item that's "on sale for a 50% off". They would rather have the illusion of a grand bargain than the reality of a fair price. They want the illusion that their stuff is worth more than it really is.
Sears tried that.
  #18  
Old 12-09-2018, 03:28 PM
mbh mbh is online now
Charter Member
 
Join Date: Jul 2000
Posts: 4,302
Quote:
Originally Posted by CookingWithGas View Post
JC Penney's. Proof that consumers are easily manipulated by fake sales.
JC Penney's tried to be honest with their customers, and their customers punished them for it!

Last edited by mbh; 12-09-2018 at 03:29 PM.
  #19  
Old 12-09-2018, 04:16 PM
nightshadea nightshadea is offline
Guest
 
Join Date: May 2001
Location: a condo in hell 10th lvl
Posts: 4,062
Quote:
Originally Posted by mbh View Post
A few years ago, one of the big retailers (Montgomery Ward, perhaps?) changed their pricing policy. Instead of putting one department on sale every week, they would have lower prices on everything, all the time.

It was a dismal failure.

People don't want to pay $100 for a $100 item. They want a $200 item that's "on sale for a 50% off". They would rather have the illusion of a grand bargain than the reality of a fair price. They want the illusion that their stuff is worth more than it really is.
it was jc penny
  #20  
Old 12-09-2018, 05:54 PM
Voyager's Avatar
Voyager Voyager is offline
Charter Member
 
Join Date: Aug 2002
Location: Deep Space
Posts: 44,705
Quote:
Originally Posted by Schnitte View Post

My feeling is (but I admit I have no insight knowledge) that it's simply a psychological tactic for promotional purposes. Under a "buy one get one free" scheme, most people realise that they're not actually getting the second item for free; they're simply buying two items, at a price which is ostensibly the price of one but really calculated to cover two items, and the option to buy really just one is not offered. Under a "buy one get the second for a penny" offer, you have the feeling that you have the option to buy one if you want to do so, but that this purchase also gets you the opportunity for a unique bargain which you should not miss.
My guess too, and a guess at the mechanism. In BOGOF sales you only really see one price. In one cent sales you see two, and people anchor on the penny as a price, which seems cheaper than the full price, even if the price per item is effectively equivalent and half the higher price.
I know BevMo does one cent wine sales all the time, but is this common for non-alcoholic products? Interesting about the prohibition on giving booze away, that might explain it.
  #21  
Old 12-09-2018, 08:53 PM
dogbutler's Avatar
dogbutler dogbutler is offline
Charter Member
 
Join Date: Feb 2001
Location: Raleigh N.C.
Posts: 13,058
Quote:
Originally Posted by mbh View Post
They would rather have the illusion of a grand bargain than the reality of a fair price. They want the illusion that their stuff is worth more than it really is.
This. I used to manage a Dollar Tree, and I got yelled at by a customer because the Christmas stuff wasn't marked down 50% 2 weeks before Christmas.
__________________
I used to be clueless, but I turned that around 360 degrees. -Ratbert
dogbutler-Not an ax murderer!
I hang out with the Cool kids
  #22  
Old 12-09-2018, 09:19 PM
nearwildheaven nearwildheaven is offline
Guest
 
Join Date: Apr 2013
Posts: 11,772
Quote:
Originally Posted by mbh View Post
A few years ago, one of the big retailers (Montgomery Ward, perhaps?) changed their pricing policy. Instead of putting one department on sale every week, they would have lower prices on everything, all the time.

It was a dismal failure.

People don't want to pay $100 for a $100 item. They want a $200 item that's "on sale for a 50% off". They would rather have the illusion of a grand bargain than the reality of a fair price. They want the illusion that their stuff is worth more than it really is.
That was JC Penney's. I've heard that the company as a whole is still in trouble, but the one near my house is always busy.
  #23  
Old 12-09-2018, 09:21 PM
nearwildheaven nearwildheaven is offline
Guest
 
Join Date: Apr 2013
Posts: 11,772
Quote:
Originally Posted by dogbutler View Post
This. I used to manage a Dollar Tree, and I got yelled at by a customer because the Christmas stuff wasn't marked down 50% 2 weeks before Christmas.


Good grief.
  #24  
Old 12-10-2018, 09:32 AM
CookingWithGas's Avatar
CookingWithGas CookingWithGas is offline
Charter Member
 
Join Date: Mar 1999
Location: Tysons Corner, VA, USA
Posts: 12,768
Economists use the term Economic Value to describe the perceived value by the customer. Part of the point of marketing is to raise this perception. As we all know, dramatic fake markdowns give the consumer an inflated sense of the value. I will never understand why consumers fall for this. The value of a product to you has nothing to do with what the price tag says. And if you are bound and determined to buy a certain product, a little research and shopping will tell you the true market value. (Yesterday I ordered a pair of earbud headphones from the manufacturer's web site for $18 that are selling on Amazon and everywhere else for $34, and the MSRP is something like $65. I wouldn't have bought them for $34.)

Quote:
Originally Posted by lingyi View Post
Compare the prices at Costco whose pricing model is no more than 15% markup (on their huge volume purchases) on what they sell against retail stores and the prices are usually really close.
When I first joined Costco I did this comparison for every item I bought for a year and Costco unit pricing is much lower than other stores. Also, nearly all of Costco's profit is from membership fees, not sales of merchandise. Where did you get the 15% figure?
__________________
Making the world a better place one fret at a time.
| | |·| |·| |·| |·| | |:| | |·| |·|
  #25  
Old 12-10-2018, 10:43 AM
RTFirefly RTFirefly is offline
Charter Member
 
Join Date: Apr 1999
Location: Maryland
Posts: 37,719
Quote:
Originally Posted by mbh View Post
JC Penney's tried to be honest with their customers, and their customers punished them for it!
Can they really separate out that one JC Penney fuckup from all the others? They also changed product lines to (unsuccessfully, AFAICT) appeal to twentysomethings, which made it hard for their longtime customer base (aging Boomers) to find stuff worth buying there. Aside from stuff like blue jeans, I used to buy practically all my clothes at Penney's. I almost never go there anymore.
  #26  
Old 12-10-2018, 10:56 AM
kayaker's Avatar
kayaker kayaker is offline
Member
 
Join Date: Jul 2009
Location: Western Pennsylvania
Posts: 30,467
Quote:
Originally Posted by RTFirefly View Post
Can they really separate out that one JC Penney fuckup from all the others? They also changed product lines to (unsuccessfully, AFAICT) appeal to twentysomethings, which made it hard for their longtime customer base (aging Boomers) to find stuff worth buying there. Aside from stuff like blue jeans, I used to buy practically all my clothes at Penney's. I almost never go there anymore.
They lost me forever when a salesperson just wouldn't accept "no" for an answer when she offered me a JCPenney credit card. I bought $150 worth of jeans and she told me I'd get X% off my purchase by getting a card. After the third or fourth "no" I was pissed off and told her to accept my cash or cancel the purchase.

When I got home there was a antitheft thing still clipped to one of the pair of jeans. I returned to the store to have it removed, but I swore I'd never return and I haven't.
  #27  
Old 12-10-2018, 01:06 PM
Voyager's Avatar
Voyager Voyager is offline
Charter Member
 
Join Date: Aug 2002
Location: Deep Space
Posts: 44,705
Quote:
Originally Posted by CookingWithGas View Post
Economists use the term Economic Value to describe the perceived value by the customer. Part of the point of marketing is to raise this perception. As we all know, dramatic fake markdowns give the consumer an inflated sense of the value. I will never understand why consumers fall for this.
Anchoring. They lock in the higher price as the value, not the price they are paying.
Anchoring works amazingly well. We got statistically significant results from our anchoring experiment we did during our behavioral engineering economics class, with n = 20. So the effect was huge.

But I'm sure the feeling of putting one over on the store helps also.
  #28  
Old 12-10-2018, 02:24 PM
RedSwinglineOne RedSwinglineOne is offline
Guest
 
Join Date: Jan 2007
Location: Silicon valley
Posts: 1,331
Quote:
Originally Posted by Asuka View Post
Is there any real advantage in not just making the second free?
I think there is a slight advantage when it comes to "perceived value".

When you give something away for free, there is an implication that the item has no real value.

By making the customer pay some token amount for the second item, the customer is acknowledging that the item does have some value and they are willing to pay for it.
  #29  
Old 12-10-2018, 02:46 PM
lingyi lingyi is offline
Guest
 
Join Date: Mar 2017
Posts: 1,339
Quote:
Originally Posted by kayaker View Post
They lost me forever when a salesperson just wouldn't accept "no" for an answer when she offered me a JCPenney credit card. I bought $150 worth of jeans and she told me I'd get X% off my purchase by getting a card. After the third or fourth "no" I was pissed off and told her to accept my cash or cancel the purchase.

When I got home there was a antitheft thing still clipped to one of the pair of jeans. I returned to the store to have it removed, but I swore I'd never return and I haven't.
Cashiers are trained and sometimes required to push the store credit card. When I worked at Officemax, a memo was sent out saying market research showed that if you bugged ...errr...told the customer about the store credit card at least three times, they would like accept the offer. So we were supposed to ask at least three times (I never asked once). Only one cashier did it and his signups increased, but so did the complaints about him!

You used to get $5 gift card for every signup, later reduced to a candy bar. The really messed up thing is about a year later, either Officemax or the bank ended the CC program and customers had to immediately pay off their credit card balance.

Last edited by lingyi; 12-10-2018 at 02:51 PM.
  #30  
Old 12-10-2018, 10:55 PM
GMANCANADA GMANCANADA is offline
Guest
 
Join Date: Mar 2003
Location: Toronto
Posts: 185
In my experience in marketing & sales as well as teaching marketing now, Cookingwithgas & Chronos are completely correct - this kind of an offer is a just way to change up a standard BOGO offer and make it appear different to consumers to catch their eye & stand out.

Other than for "controlled products" like alcohol, cigarettes etc I've never heard of any tax or government related implications of giving a product away. Sales taxes are paid as a % on the total revenue generated by the taxable products.

Lastly - @Cookingwithgas
Quote:
nearly all of Costco's profit is from membership fees, not sales of merchandise. Where did you get the 15% figure?
I've never heard that, and I checked their 2017 annual report info that's not even close to being accurate. They sold $126.2B in products and $2.9B in memberships. In both cases they have admin & overhead etc to deduct from that. So it's not like the $2.9B is "straight profit". I'd agree they make higher % margin on their memberships, since they wouldn't have as much overhead or any "product costs" associated with the memberships.

The 15% figure for their margin is too high. In my experience selling a wide variety of product categories, they price everything at 8 to 12% margin. Their annual report says they make over about 11% average margin on products.

Last point - although they do make "profit" on their memberships, the reason they started charging is that it by not being open to the public, it allowed them to open stores on land that was zoned "industrial" which was far lower property taxes and land costs. That's changed in the last 15 years as governments have either closed that loophole and they're run out of viable industrial sites on the outskirts of cities. (Tthis has come up in previous threads and I've provided citations, but don't fell like looking them up now.)
  #31  
Old 12-11-2018, 01:18 AM
lingyi lingyi is offline
Guest
 
Join Date: Mar 2017
Posts: 1,339
I first heard about the 15% max on a news report about Costco. Here's an article about it:

"Costco works to keep prices low by buying in huge quantity and never marking up any product more than 15 percent, less than the typical 25 percent at a supermarket or 50 percent at a department store. Costco makes up for those low margins by charging a $55 annual membership fee of its 64 million members. With more than 90 percent of its members renewing each year, the fee is evidently not a significant deterrent."

https://www.cnbc.com/id/47175492

The max 15% is on their own Kirkland products. And the markup on electronics is really small, I was told 3-4% on printers when I worked at Officemax.

If there's still any question, here it's directly form the CEO himself:

"3. Low markups
Since Costco makes a great deal of money on membership dues, it’s able to charge a minimal markup of 14% on its private label and sometimes less on brand names.

The CEO said 15% is the ceiling, but he likes to stay below that if he can."

https://clark.com/shopping-retail/co...ark-ways-save/

Last edited by lingyi; 12-11-2018 at 01:22 AM.
  #32  
Old 12-11-2018, 02:38 AM
lingyi lingyi is offline
Guest
 
Join Date: Mar 2017
Posts: 1,339
Quote:
Originally Posted by GMANCANADA View Post
In my experience in marketing & sales as well as teaching marketing now, Cookingwithgas & Chronos are completely correct - this kind of an offer is a just way to change up a standard BOGO offer and make it appear different to consumers to catch their eye & stand out.

Other than for "controlled products" like alcohol, cigarettes etc I've never heard of any tax or government related implications of giving a product away. Sales taxes are paid as a % on the total revenue generated by the taxable products.

Lastly - @Cookingwithgas

I've never heard that, and I checked their 2017 annual report info that's not even close to being accurate. They sold $126.2B in products and $2.9B in memberships. In both cases they have admin & overhead etc to deduct from that. So it's not like the $2.9B is "straight profit". I'd agree they make higher % margin on their memberships, since they wouldn't have as much overhead or any "product costs" associated with the memberships.

The 15% figure for their margin is too high. In my experience selling a wide variety of product categories, they price everything at 8 to 12% margin. Their annual report says they make over about 11% average margin on products.

Last point - although they do make "profit" on their memberships, the reason they started charging is that it by not being open to the public, it allowed them to open stores on land that was zoned "industrial" which was far lower property taxes and land costs. That's changed in the last 15 years as governments have either closed that loophole and they're run out of viable industrial sites on the outskirts of cities. (Tthis has come up in previous threads and I've provided citations, but don't fell like looking them up now.)
Here's Costco's financials to date:

https://www.marketwatch.com/investin...ost/financials

I don't see the breakdown between sales and memberships in there but do see 129.03B in Sales/Revenue. So taking ~126B at 11% profit = ~14B in Gross Profit of goods. Their Net Profit was 2.68B and a large part of the ~11.3B difference between the Gross Profit and Net Profit was overhead (buildings, labor, admin, etc) for the sales of goods. So the low overhead (primarily labor and admin) ~2.68B from memberships are likely a large part of their Net Profit.

Edit: About Costco memberships:

"Revenues from membership fees are great. Aside from a few minutes of an employee’s time, plus the cost of the card and subsequent promotional mailings, managing membership isn't too costly. As such, Costco’s $2.6 billion in membership fee revenue is almost entirely profit.

When you consider that in 2016, Costco’s operating income was only $3.6 billion, you can see why the company needs membership fees to stay in business. Thankfully, its membership numbers keep growing: they were up 8% in 2014, 6% in 2015 and 9% in 2016. The company is likely to not only maintain, but to increase its revenue and profit in the coming years."

https://www.investopedia.com/article...rship-fees.asp

Last edited by lingyi; 12-11-2018 at 02:41 AM.
  #33  
Old 12-11-2018, 03:23 AM
GMANCANADA GMANCANADA is offline
Guest
 
Join Date: Mar 2003
Location: Toronto
Posts: 185
I'm going directly off their 2017 annual report as published on their website in PDF:
http://phx.corporate-ir.net/Mobile.View?c=83830

There is a Tab called "Financial Reports". p23 of the 2017 shows the data I cited for 53 weeks ending Sept. 23, 2017. including net sales, membership income etc. Overall margin as a % of sales is 11.3%. These numbers seem to me to speak for themselves.

I've never sold P/L to them, it wouldn't surprise me if they target 15% margin on their Kirkland brand. I see in their 2017 AR, they have managed to push up the GM by about 0.5% since 2013, so they're clearly trying to push their overall margins up these days,

I haven't called on them directly in about 10 years. When I or my team presented to them, we were told (by them) to always present new branded products an MSRP with minimum 8% and maximum 12% margin. We'd give them a range plus show them what price our products were being sold for by their key competitors by region then they'd decide. They told us (then) they'd never go above 12%, even if the competitive situation allowed for it. If they needed to be below 8% they just wouldn't list it.

I'm not sure what your point is about the membership. No question it's a big source of profit. My point is that that it's not "all of Costco's profit.". Saying that implies that their entire business is basically break-even, which it clearly isn't.
  #34  
Old 12-11-2018, 04:23 AM
lingyi lingyi is offline
Guest
 
Join Date: Mar 2017
Posts: 1,339
Quote:
Originally Posted by GMANCANADA View Post
I'm going directly off their 2017 annual report as published on their website in PDF:
http://phx.corporate-ir.net/Mobile.View?c=83830

There is a Tab called "Financial Reports". p23 of the 2017 shows the data I cited for 53 weeks ending Sept. 23, 2017. including net sales, membership income etc. Overall margin as a % of sales is 11.3%. These numbers seem to me to speak for themselves.

I've never sold P/L to them, it wouldn't surprise me if they target 15% margin on their Kirkland brand. I see in their 2017 AR, they have managed to push up the GM by about 0.5% since 2013, so they're clearly trying to push their overall margins up these days,

I haven't called on them directly in about 10 years. When I or my team presented to them, we were told (by them) to always present new branded products an MSRP with minimum 8% and maximum 12% margin. We'd give them a range plus show them what price our products were being sold for by their key competitors by region then they'd decide. They told us (then) they'd never go above 12%, even if the competitive situation allowed for it. If they needed to be below 8% they just wouldn't list it.

I'm not sure what your point is about the membership. No question it's a big source of profit. My point is that that it's not "all of Costco's profit.". Saying that implies that their entire business is basically break-even, which it clearly isn't.
With all due respect, I take the CEO of Costco's statement in a printed interview that their max markup is 15% over what you were told by a buyer. I can't find the news story online, but IIRC, it was mentioned that the 15% max markup was part of the founder's model.

As for the membership fees, neither CookingwithGas nor I stated that it was "all of Costco's profit". CookingwithGas stated "inearly all of Costco's profit" and I never stated or implied it was "all of Costco's profit". But I did posit that it was a high percentage of their net profit.

You do realize and accept that margin doesn't equal net profit. If it did, then 11.3% would mean that Costco's Net Profit should be over 11B plus whatever profit they make from memberships versus the 2.6B Net Profit reported on the page I linked to and their 3.6B operating income would be much higher if they had 11B+ in Net Profits.

http://phx.corporate-ir.net/mobile.v...d=1&id=2305024

I see where you got the 11.3% markup from, 126.172 in Net Sale less 111.882B in Merchandise Costs, but keep going down and you'll see significantly their Income Before Income Taxes was 4.039B and their Net Profit was 2.679B (right in line with the Investopedia link I gave). So unless I'm grossly missing something and they're magically hiding over 9B in Income Before Income Taxes, their Net Income stands at 2.67B, with membership fees LIKELY "nearly all of Costco's profit..."

Last edited by lingyi; 12-11-2018 at 04:25 AM.
  #35  
Old 12-11-2018, 04:35 AM
lingyi lingyi is offline
Guest
 
Join Date: Mar 2017
Posts: 1,339
As an example of how Gross Margin gets diluted when it comes to Net Profit / Net Value. A solar company I worked for had $150M in Gross Sales with a Gross Profit based on Cost of Goods was $30-35M when I left. Less than a year later the company was sold for $12M because that was about what the Net Profit / Net Value of the $150M in sales was after ALL additional costs, expenses and taxes were paid.

Last edited by lingyi; 12-11-2018 at 04:37 AM.
  #36  
Old 12-11-2018, 10:07 PM
GMANCANADA GMANCANADA is offline
Guest
 
Join Date: Mar 2003
Location: Toronto
Posts: 185
You win.
  #37  
Old 12-11-2018, 10:29 PM
lingyi lingyi is offline
Guest
 
Join Date: Mar 2017
Posts: 1,339
Now give me a bigggg hug!

LOL - Peace!
  #38  
Old 12-12-2018, 10:43 AM
TubaDiva's Avatar
TubaDiva TubaDiva is offline
Capo di tutti capi
Administrator
 
Join Date: Mar 1999
Location: In the land of OO-bla-dee
Posts: 10,941
Quote:
Originally Posted by RedSwinglineOne View Post
I think there is a slight advantage when it comes to "perceived value".

When you give something away for free, there is an implication that the item has no real value.

By making the customer pay some token amount for the second item, the customer is acknowledging that the item does have some value and they are willing to pay for it.
In a similar situation, I was recently working with some people on scheduling a social event. We were deciding how to present it to the membership of my club and the question was asked shouldn't we make this a free event to registered members to say "thank you for your service this year."

The answer was "No" because what we have found happens when you offer a social event for free is that everyone signs up for it but very few people actually show up on the day of the event; there's some kind of bias that kicks in that makes people feel that the event is inconsequential because it's free and so they can blow it off, no problem.

We're paying to set this event up at a local brewing company and there's significant expenses, like per the headcount on the beer (there's a minimum). We're catering food. It's a celebration lunch for the membership. And if they don't have some skin in the game -- if they aren't charged SOMETHING -- people won't attend. Free is not enough.

Go figure.

Jenny
your humble TubaDiva
Reply

Bookmarks

Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is Off
HTML code is Off

Forum Jump


All times are GMT -5. The time now is 12:02 AM.

Powered by vBulletin® Version 3.8.7
Copyright ©2000 - 2019, vBulletin Solutions, Inc.

Send questions for Cecil Adams to: cecil@straightdope.com

Send comments about this website to: webmaster@straightdope.com

Terms of Use / Privacy Policy

Advertise on the Straight Dope!
(Your direct line to thousands of the smartest, hippest people on the planet, plus a few total dipsticks.)

Copyright © 2018 STM Reader, LLC.

 
Copyright © 2017