Wednesday, November 24, 2010

Black Friday and Markdowns

As Black Friday approaches, we should consider how retailers are affected both in the short term and the long term by a deep discount strategy. If retailers offer steep markdowns on occasion, such as on Black Friday, that may drive foot traffic to the store. While shoppers are there, they will buy other full price items. Thus, the store generates a good return on the "investment" of offering a steep discount on a popular item.

However, retailers also have to consider the long term effects of offering steep markdowns. If a retailer finds itself offering these markdowns rather frequently, then customers will begin to wait to make purchases until the sale occurs. Thus, we may see customers cherry picking items when they go on sale, leading to sharply lower profitability for the retailer.

What's a retailer to do though if its competitors are all offering huge sales, particularly on a day such as Black Friday? One thing retailers must consider is how to increase the number of customer visits. How can we get customers to come back more frequently? Offering items that consumers must purchase more often, which might even be necessities, can drive traffic. That's one reason, for instance, that Target has expanded its food offering. The Target P-Fresh initiative helps drive more frequent consumer visits. For apparel retailers, they might consider offering certain items on a limited basis or in smaller batches. That scarcity effect may drive consumers to want to visit more often, lest they miss an opportunity to see a unique new item. So, as retailers enter Black Friday, they must think about how to use this opportunity not just to cross-sell full price items on that particular day, but also to encourage customers to visit more often in the days and weeks ahead. That increased frequency of visits will make those steep markdowns much more palatable for the retailer.

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