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How 50% discounts really work

They're designed to separate you from your money. How to come out ahead.

By Karen Datko Oct 28, 2010 9:32AM

This Deal of the Day comes from Kelli B. Grant at partner site SmartMoney.

 

Looking for a good deal? How's 50% off sound? Once a bargain-basement super deal, getting half off is now about what shoppers can -- and should -- expect from a sale, experts say.

And in preparation for the holiday rush, stores have figured out how to give it to them and still turn a profit.

 

Markdowns have already approached that level in toys and electronics, which account for much of holiday spending, says Alison Paul of Deloitte Consulting. Household goods and small appliances are also likely to hit that magic mark by Black Friday.

 

"If the price is already 50% off, take it and take it now," says Jeff Green, who runs a retail consulting firm.

Although half off may seem like a boon to consumers, retailers are still profiting, says Adrienne Tennant, a retail analyst at investment bank Janney Montgomery Scott. These deep and temporary markdowns are essentially loss leaders, designed to lure shoppers into buying more items in one visit -- or to generate more visits from shoppers wise to the strategy of rotating discounts.

 

"(Consumers) have traditionally been quite motivated by sales because we understand that means 'here today and gone tomorrow,'" says Kit Yarrow, a professor of psychology and marketing at Golden Gate University in San Francisco. But in the store, a deal for the shopper becomes an opportunity for the retailer to up-sell.

 

One thing stores can't do to make their deals look good: inflate prices. It's illegal for stores selling other companies' products (such as Sears or Best Buy) to set prices above those of the manufacturer, says Gloria Barczak, a professor of marketing at Northeastern University in Boston. Single-brand stores like Gap or Ann Taylor can pull a price switch but rarely do -- and experts say it's ineffective. Loyal shoppers are quick to spot price or quality changes and won't buy or will look elsewhere, Barczak says.

 

There are three big ways retailers are able to give you that 50% off -- and maintain their profit margins. But savvy shoppers can separate the real values from the deals designed to get you to mindlessly hand over your credit card.

 

Sales-cycle lows: Stores rotate which categories and brands go on sale each week, and the depth of the discount changes over the course of a month, too. To figure out when your favorite store offers its best deals, sign up for its e-mail list. Then scan them over the next 30 days -- you'll quickly get a sense of the highs and lows, and how often the best discounts crop up.

 

Borders, for example, usually offers weekly deals for 33% off the regular price of one item of your choice, but hands out a 40%-off coupon at least once a month. Figure out when and time your purchase to that week.

 

Limited-time deals: Keeping sales limited to a tight window is another easy way for stores to offer the big discounts shoppers want, or to create a shopping frenzy, a la Black Friday, says Barczak. At the regular Saturday "one-day sales" at Macy's, there are deeper discounts until 11 a.m., then lesser deals that continue until closing. The 40%-off sales at Gap have also been limited to single days this fall.

 

That creates a powerful psychological incentive, says Yarrow. "That fear of missing out is giant in the minds of consumers." In return, the store gets a rush of customers who are likely to put full-priced items in their baskets, too.

 

Shipping charges: Even a big online discount can be offset if you pay the full price for shipping charges. Lee Jeans recently offered 50% off all online jeans orders, but someone buying one pair on sale for $21 would still pay $5.95 for shipping, which in effect reduced the discount to 36%.

 

Some merchants will offer a big discount and free shipping together this holiday season, but not with regularity until the Monday after Thanksgiving, when people do more holiday shopping online.

 

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