Why don't more retailers sell things for less so that people will buy more?

Factual Questions
1

Bizarre phrasing, but you have to fit the gist of your OP into the subject line.

Whenever a consumer feels like they’re getting a deal, especially a great deal, they’ll invariably spend more money and buy more. The same person that may reluctantly spend $10 on two items at the drug store will spend $20 or $30 at an “Everything’s a dollar” store because of the perceived deal at hand, even if they hadn’t intended to spent that much money in the first place. I think of it as “the Ikea Effect” - Ikea customers are constantly loading up on tons of the cheap things that the store sells - $2 packs of batteries, $3 bundles of hangers, $2 umbrellas, and so on, “because they’re such great deals.” I saw this in action recently - a friend who was shopping with me was too broke to buy groceries, but ended up buying almost $30 worth of this cheap stuff, because “…but it’s an umbrella for $2!”

I just think that this is a very fundamental aspect of human psychology - when someone perceives that they’re getting a deal, they’ll spend *significantly * more money than if they think things are priced “normally.”

I’m stingy when it comes to books - I think that especially since the industry-wide shift to trade paperbacks over mass-market paperbacks, books are way overpriced (aka, the “I should be able to buy Crime and Punishment for less than $18.95” effect). Because of this, I tend to not buy books from places like Borders or Barnes and Noble - I’ll buy them online or used when possible, and even then, grudgingly. But I recently found a local bookstore that sells remainders - books that didn’t sell well and were returned to the publisher to be blown out at discount rates. I embodied this psychological effect in this shopping trip - I spent almost $100 on remaindered books (that were really only 30% cheaper or so than if I had just gone to Borders) when I wouldn’t be able to bring myself to spend even $20 on a book at a chain store. I felt that “because I was getting such a great deal,” I had to really make the most of it and buy buy buy.

So why don’t more retailers exploit this fundamental pyschological effect in their pricing? Imagine if tomorrow, Borders suddenly announced “every item in our stores is 30% off, permanently.” Besides immediately putting Barnes and Noble and Books-a-Million out of business, Borders would CASH THE HELL IN as people flocked to buy discounted books. People that may spend only $15 in a borders trip would drop $50, because they’d be getting more books for it. And they’d do it more often. The amountof money lost by discounting the product would be more than recouped by the increased volume of sales due to the psychological effect.

But why not take it further - I always wonder why certain gas stations don’t just make a habit of always selling gas for $.25 less than the average rate - people would FLOCK to them, and I guarantee they’d do twice the business that they currently do.

I just realized that this might be better suited to IMHO, but I think that there may be a factual answer to it, so it goes here for now.

2

Well, it’s also a question of profit margins. Obviously some stores exist to fill these niches, but in your last example, $.25 is basically the entire markup for gasoline in the United States. They simply would lose money at that price, and presumably that’s true for a number of other businesses that you mention.

3

First, if one retailer sells things for omfgcheap, other retailers will want to compete. If everyone lowers their prices then they’re back to where they started, except now they’re making less profit.

Secondly, profit is a function of income vs expense. Sorry if this example sounds a little patronising to you, I don’t know how much maths you know and I’m not much good at explaining things myself but suppose you have a 20cm piece of string and you have to make the biggest possible rectangle with it. You can make a 1 x 9 rectangle or a 2 x 8 one or whatever, but the dimensions that give you the largest area is 5 x 5, because it provides the best balance between length and width. The calculating that goes on behind retail works in pretty much the same way, though it’s a lot more complicated. But anyway, the point is, selling more stuff doesn’t necessarily equal more profit. You could probably sell a hell of a lot by putting, say, a 0.01% markup on your goods. But would you make any money that way?

4

My brother for one of those wholesale clubs and they have a gas station. They sell gas exactly at the breakeven point. The idea is to get people to buy memberships, since they are needed to buy the gas. Their gas is never more than 5 or 6 cents cheaper than Sheetz, their nearest competetor. If someone sold gas for .25 under the average, people would flock to them so fast that they would be bankrupt in days.

The idea isn’t to maximize sales, its to maximize profits. Boarders cannot afford to sell everything for 30% off. They can do it on many new released because they can buy enough to get a volume discount.

5

In a previous thread, a Doper claimed that stations make less profit per gallon when gas is expensive than when it was cheap. Makes sense–people won’t drive out of their way to save 25 cents when gas is selling for $0.89/gallon, but when gas is $2.79, everyone’s counting pennies all of a sudden.

Of course, the above might not apply post-Katrina; we’re in a rather unique situation because everyone’s been topping off their gas tanks everyday, increasing demand out of panic and therefore stations don’t feel any pressure to drop prices.

It’s like this: a month ago, if I suddenly marked up my gas to $6.00/gallon (ignoring the legality), people’d laugh at me and wouldn’t give me a cent of business. But now they’d take it as a sign that OH NO WE’RE RUNNING OUT OF GAS MUST TOP OFF.

6

What most people are saying is true…the point is: People already do this. The goal is to maximize the profit curve.

Like csharpmajor was explaining, profit can be viewed on a curve, with price and volume the two components. High price = low volume - higher profit per item, and low price = high volume, lower profit per item. There is a point where the combination of price and volume maximize the total profit: This is where retailers want to sell their goods. There are people whose entire job is to find that profit maximizing price for their employer.

Of course, there are promotions where you may choose to lose some money in order to gain a customer base, but over the long haul, very low profit margin + high volume doesn’t make as much money as medium price + medium volume.

7

Here is a Straight Dope column where Cecil discusses part of this question WRT cigarette prices.

Some stores offer what they call “loss leaders”. Like the example of the wholesale club’s selling gas at cost, the idea is to offer some items cheap to get you into the store. For example, my local supermarket is offering some items at 10 for $10. These are items that most people use, like oatmeal, pudding snacks, and so forth. They’re selling these items cheaply in the hope that you’ll buy more expensive, more profitable items. My own grocery list is the perfect example. I need oatmeal, so I can buy two or three cartons at this price. I can then rationalize buying something more expensive, like pre-sliced apples, because I’m saving so much on the oatmeal, and that’s what the supermarket is hoping I’ll do.

(Don’t laugh at the pre-sliced apples. They exist, and sometimes they’re cheaper than actual apples.)

Robin

8

And then there’s the old bait-and-switch: a retailer advertises X product, which usually sells for $100 for the sale price of $50. That’s a great deal, so you rush to the store. When you get there, they are sold out of X, but wait! They have Y product, which usually sells for $75, for $60. You didn’t read the fine print, which states in .00 font that the sale price is limited to items in stock. Of course they’re not going to tell you they only had one of X in stock when they placed the ad. They’re hoping since you are already in the store with wallet in hand, you’ll go ahead and buy something.

9

Bait-and-switch is illegal.

Robin

10

My take on this situation has always been that some companies are so desperate to keep operating costs LOW, they keep prices HIGH. Why, how you ask? If a company can sell carloads of widgets at 10 bucks, and make a profit, then raise the price to 30 bucks, sell fewer widgets at a greater profit, which more than offsets wages, shipping costs, and other overhead expenses. Fewer employees are needed to bring in the same profit. Perhaps some stores can be closed, or consolidated, or have fewer hours. A lower number of people[workers and customers] in a store can help reduce shoplifting, accidents,or other situations that take away from the bottom line.

11

The OP asks for a basic course in retail economics from a message board. :rolleyes:

My suggestion: start with a basic economics course, then look around for a book on retail economics, or a course on it from the local community college. It isn’t particularly hard stuff to learn, though the practical application can be the difference between success and failure.

12

Snakescatlady noted that the ad would have fine print stating “Limited Quanities” included - as per your own link, that would make it legal.

It should also be noted that many large retailers have pretty small profit margins already. For example, last year Walmart had a net profit of $10.3 billion, out of $285.2 bill sales revenue - only a 3.6% sales margin.

13

Yes, but if it didn’t happen there wouldn’t be a name for it.

14

Unicorns exist, or else there wouldn’t be a name for them.

15

Wait a minute…are you saying unicorns don’t exist???

16

I can certainly relate to this. But your “buy buy buy” response was because you found books that were marked down, that were cheaper than usual. You were getting a special deal. Plus, if you passed up that opportunity, you might not ever find those particular books for that low a price again. But if the books are regularly priced that low, it’s not special, and you won’t feel the urgency about buying them.

Plus, there are people out there who aren’t nearly as price-conscious as you and I are. If they see something they want, they buy it, without worrying too much about how much it costs or whether it’d be cheaper elsewhere. Lowering prices isn’t going to increase sales to those kinds of people so much.

That’s part of the reason the same book is available at so many different prices, depending on whether you buy it from a bookstore or a discount store or a book club or online, new releases or remainders, hardcover or paperback: different people are willing to pay different amounts for the same thing, and the sellers would like each buyer to pay as much as they’re willing to and no less.

17

There are a lot of consumers out there who won’t buy something if the price is too low, figuring that that means there’s something wrong with it. And there are a lot of people who would rather pay more for a preceived premium good.

If that was the everyday price, would you have considered it such a great deal?

18

This is an excellent point. Which is why many sellers try to seperate the market of price conscious people from the market of non-price conscious people (Toyota vs Lexus, coupons at supermarkets, etc).

19

Yeah, welcome to the Dope. You must be new here.