50% off for everybody stupid

Black Friday starts and people get in lines for hours, trample other to death and buy stuff they don’t need – all because they believe they get a deal of a life time.

‎50% off has many meanings:
1) That shop is ripping you off the rest of the year
2) It was produced to be 50% of the original quality
3) The product is so bad no one else wants it
4) They added 100% to give 50%

and probably a few other meanings.

Now what would 50% off actually mean for a business?

You have to check balance sheets and P+Ls to figure it out but since many of the crazy offers are from public companies we can look at how this might be possible:

1) Cost structure
Overall production, sales & marketing and overhead leaves any given company with something like 5 to 15% profitability if everything goes well. Some make it to 20% others just breaking even. In other words taking 50% out of a product sales price is mathematically impossible or those companies have to calculate a huge loss.

2) Marketing
Now most of those Black Friday offers that would lead to a huge loss are even heavily advertised, which would further increase that loss. That is not likely to happen.

3) Profitability
Volume is certainly a good answer – but volume at 50% discount is still a loss if the company is only able to get to 5-15% profitability.Everything above the 5-15% mark would actually kill that company.

4) Consumer Idiocracy
Consumers at large are a rather primitive species. Give them a discount sign and they buy as long as there is something on their bank account. Test: go through any grocery store and you will find the following “Specials”: Product X is $2.39 if you buy 3 it is only $7.49 – people buy the tree pack. $2.39 times three is only $7.17 so it would be cheaper to buy three individually but most still buy the pack of three. Why? Because “discounts” don’t address our brain but much deeper in our “Pyramid of needs” the sense for winning something.

5) How to offer something for 50% discount?
a) Nobody knows what the product is actually worth – the discount sticker could also say “At night it is darker than during the day”
b) Produce well understood products with either less quality, less raw material, no packaging…. so that the price in the store can appear as less. But produce it especially for that event

6) Offering even 200% discount
I came across this “great offer” of 200% discount. Hmm – 100% would mean it is free because it is 100% of the original cost. Now 200% would mean I buy it and get the original price for that product payed on top of it. My discussion with that sales person wasn’t very fruitful. It would be the same as I would explain to my dog what the red shift in Astronomy is.

Now for those who just have fun shopping in that environment all the above is a boring explanation. It’s like explaining a gambler who sits for three nights in a casino in Vegas that he/she can’t really win. And for the rest of us – we can go shopping when it’s over and normal humans are back in the shops.

Have a wonderful Thanksgiving weekend

Axel