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.
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.
:smack:
Good grief.
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.)
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?
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.
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.
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.
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.
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.)
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/costco-ceo-clark-ways-save/
Here’s Costco’s financials to date:
https://www.marketwatch.com/investing/stock/cost/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/articles/investing/071015/3-reasons-costco-has-membership-fees.asp
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.view?c=83830&v=203&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…”
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.
You win.
Now give me a bigggg hug! 
LOL - Peace!
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