Economics of Black Friday Sales

The retail industry has been rapidly evolving for many years. The industry has adapted to a wide range of changes varying from the introduction of online retailing to the widespread use of automation. However, there are some aspects of retailing which have not changed for a long time.

Retail companies all across the world still have some days when they sell the products at a heavily discounted price as compared to other days. In the United States, these retail sales happen on the Friday after Thanksgiving and hence are known as Black Friday sales.

In this article, we will have a closer look at what Black Friday sales are and what is the economic impact of such sales on the business of retailing.

What are Black Friday Sales?

Black Friday sales refer to a period of time when retail companies in a particular geographical region drop their prices by deeply discounting their products.

It is common for retail companies to drop their prices by 50% to 70% during a particular time of the year. Hence, a product which may sell at $1000 throughout the year may end up being sold for only about $300 during this period. Black Friday discounts may only be offered on a single day or over a period of three to four days.

Prima-facie, Black Friday seems like a bad value proposition for retailers. It would seem like they are just giving away stuff for free to their customers by dropping the prices to irrational levels. However, this is not the case.

There are several economic benefits of Black Friday sales. Some of the important ones have been listed below:

  1. Price Discrimination: The first and foremost reasons stores offer Black Friday sales is because they want to implement a strategy called Price Discrimination. Price discrimination is a strategy wherein stores offer the same product at a lower cost to certain consumers for a certain period of time. However, because the price offered is so low, many customers tend to flood the store at the same time and buying the product becomes a terrible experience.

    The purpose of Black Friday sales is to try to reach out to a wider customer base. On normal days, the store is trying to sell products to people who value the buying experience and can buy a higher price for the product. Such customers tend to have an abundance of money but may not have the time to buy a particular product. On the other hand, Black Friday sales are meant for customers who have an abundance of time but not the money. This is because Black Friday customers typically have to spend their holiday standing in long queues in order to obtain the discount that allows them to buy the product for a cheaper price.

    From the retailer’s point of view, there is no loss since the wealthy customers who were going to buy a product on regular days will not buy during Black Friday sales and vice versa.

  2. Loss Leader Strategy: Black Friday sales does not mean that retails provide a huge discount on all products in the store. Retailers carefully study consumer psychology to identify the main products that they are looking to buy. They then discount these specific products to very low levels and advertise these products.

    The idea is to draw the customers in the door using these products. Once the customers are in the door and in the holiday shopping mood, they are likely to buy other products as well. This is because they cannot go store hopping during a Black Friday sale because of the sheer crowd present at all the stores. Hence, certain products are used as loss leaders so that the retailer can make money on other products.

  3. Selling Preferential Brands: Retail stores also make higher profits during Black Friday sales by selling products of brands that wouldn’t normally sell as much.

    For instance, the store may discount an Apple phone by 25% during the Black Friday sale. However, they may discount the phone of another lesser-known brand by 60% during the same period. Hence, some of the crowd trying to purchase the Apple phone will end up purchasing the lesser-known brand’s phone. Since this brand is generating higher sales, they might give a high commission to the retailer.

    Also, retailers tend to push their own in-house products during Black Friday sales which helps them generate a much higher rate of return.

  4. Up Selling: Retailers are able to generate more money via up selling products during Black Friday sales. It is common for retailers to aggressively try to sell insurance, extended warranty and accessories for products during such period. Since the customers are already saving a lot of money, they end up buying these additional products. These products generally provided very high margin to the retailers. Hence, by using upselling, retailers are able to extract a significantly higher value from their customers despite the price being low.

  5. Urgency: Deeply discounted Black Friday sales are deliberately offered by retailers after long intervals of time such as once every year. The idea behind this huge time gap is to ensure that there is always a sense of urgency that customers feel once the sale does arise.

    Customers want to make the maximum when the deal is actually present. Hence, a lot of the times, they end up spending more than their actual budget. Also, these sales are generally offered a month before holiday season. This is because consumers have the longest shopping list during that season and retailers are able to increase their sales significantly.

  6. Fewer Returns: Last but not the least, deeply discounted Black Friday sales have statistically shown to lead to fewer returns. This because of multiple reasons. Firstly, a lot of these products are given by consumers to others as gifts.

    Since gifts have an emotional value, they are less likely to be returned or exchanged. Also, customers typically believe that they have received a very low price for a product. Hence, even if the product does not completely meet their expectations, they are still likely to not return it since they view it as being worth the discounted price at least! The opportunity cost i.e. the cost to buy a similar product would be higher by the time the customer thinks of making a return. This is why they generally tend to avoid making any returns.

From the above points, it is very clear, that Black Friday or deeply discounted sales are not a loss-making proposition for most retail chains.

There is very clear business and financial value which is derived from conducting these sales. This is the reason why they have become so popular and have survived for so many years in an industry which is rapidly undergoing change. However, that does not mean that there aren’t any disadvantages of deep discounting. We will understand the disadvantages of deep discounting in the next article.

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Finance in Retail