Is the supermarket discounting or ripping us off?

Melbourne Herald Sun, 23rd January, 2010

Friday evening. Pop down to the supermarket for a bottle of white to go with the fish. Aha, Safeway have 30% off their wines this week. Then you study the poster more closely. The offer is only if you buy a half dozen. So if I buy just one, I'll pay 43% more per bottle than if I bought a box?

This annoys me so I pop across the road to Coles. They have exactly the same offer, on the same terms. I wonder if the ACCC is aware of this price collusion. Dinner's on the stove so I grab a single bottle and resentfully pay nearly half more than the discounted price, and make a mental note to avoid supermarkets for my wine in future.

Can you see what has happened? Some bright spark in the marketing department has said, "Let's sell lots of wine this week by giving them big discounts on half-dozen boxes." But in the thinking process, completely neglected to foresee that they would annoy the hell out of every customer who did not want to buy their wine by the crate.

We're all used to the fact that the gift we bought for a Christmas present will cost half as much in the Boxing Day sale. It's a pain to see it in the store window but we accept that them's the breaks in shopping.

But at other times, discounting is a delicate process that needs to be handled with tact. There are many ways of doing it. The brown goods stores like the "no repayment, no interest for two years" angle. If you analyse the offer, two years' interest on the cost would equal about 20 per cent discount. On high profit items like furniture that ensures there will still be a good return in the end.

The crowds of buyers stampeding through the shopping centres this month shows you how many of the public hold back their purchases until the big red SALE! stickers appear. It also reveals the high mark-ups put on many goods, particularly the swanky up-market clothing. A pair of trousers may be hundreds of dollars cheaper, a suit by a thousand or more. I have to confess that any item of mine bearing labels by Zegna or Versace has been acquired thanks to massive price-slashing.

On the other side of the coin, if yours is a small business you have to be cautious about giving discounts,. Follow this example: you have an item that costs you $100, normally marked up by 30 per cent. That makes it $130. Being the January sales, you cut the price by 20 per cent, to $104.

Now, in order to make as much as the original profit, you'll have to sell seven times more items - and still only make $28.

If you're in business, you can't be lazy about thinking through the sums. You have to know precisely the value of an item you are selling and the true cost of discounts.

Now the public find maths a strain they were glad to leave behind after school, which is fortunate for many retailers who often create illusions of generosity while giving away very little.

Take the example of selling jeans. Say you find some belts that only cost two dollars each, in quantity from China. Instead of cutting the price by 10 or 20 dollars, you add a "free fashion belt". You have increased the perceived value of the purchase - but kept most of your profit margin.

Now you're using discounting to increase your sales, keeping money in your pocket, and not infuriating the customers.


ray@ebeatty.com