[Preamble: I’m re-sharing an older post this morning, mainly because my hosting provider had an outage, and I’ve now run out of time. Awkward. But enjoy.]

Here’s a question: what is a sale, exactly?

The Convention

This is the somewhat-nebulous old-school explanation (which feels a bit inherited – like the answer to a question that I asked as a toddler):

  • Shops sell us fun toys
  • But they usually order extra toys; so you’re not disappointed if you really want one.
  • Because of that, they usually have toys left over.
  • Which is not nice, because they must get new toys to sell; only, now the old toys are taking up space.
  • So they have a sale to get rid of the old toys.

And I think that’s the way that we still think of sales: they’re cleaning out old stock, and making way for new product lines, and so on.

Here’s The Trouble With That

In our naiveté, we’re assuming that shops and chain-stores are just going to continue blindly hoping that they’ll sell most of their stuff at full price, only to declare “Oh shucks, we didn’t, let’s have a sale then” every Black Friday.

Oh – and that they’ll also just ignore the mass shopping hysteria that causes deaths and injuries.

Uh no.

If I was a shopkeeper, and I knew that people went crazy with their credit cards on Black Friday, then you’d only catch me off guard for one year. Maybe two.

Because then I’d start to do the following:

  1. Massaging prices higher in the months prior to Black Friday, in order to have larger discounts on the day, with the same margin that I always wanted.
  2. Listing high prices on the product that would never be charged (ie. items that would permanently be on sale) – making sure that I would still get the price that I always wanted.

Some Examples

A quote from JC Penney’s new CEO, Mike Ullman:

“We must sell and will compete to win. That means initially marking up our goods to sufficient levels to protect our margins when the discount or sale is applied.”

In 2012, JC Penney’s then CEO Ron Johnson said that less than one out of every 500 items was sold to customers at full price, and customers were receiving, on average, a 60% discount (up from 38% a decade previously).

But interestingly, the average price remained the same.

What does that tell you?

The only thing that changed was the initial price…

Even more interestingly – when Ron Johnson decided to dispense with all the sales, and just charge low prices from the outset, JC Penney did so badly that he was fired.

The Bargain Weakness

We all like to think that we’re shrewd buyers with an eye for a bargain.

What we mean is: we like to see giant discount stickers. And coupons.

So not shrewd then – just irrationally obsessed.

PS: for more, check out this Wall Street Journal article: “The Dirty Secret of ‘Discounts’ – Black Friday and beyond“.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.