Capital Ideas Blog

Confessions of a shopping-data-holic

By Pradeep K. Chintagunta

From: Blog

This post originally appeared on the Kilts Center Faculty Blog.

In the movie Confessions of a Shopaholic, Rebecca Bloomwood (Isla Fisher) says, “When I shop, the world gets better, and the world is better, but then it’s not, and I need to do it again.” For retailers gearing up for Black Friday, a world filled with Ms. Bloomwoods would make this a joyous holiday season.
The holiday season is usually defined as the 61 days of November and December. It accounts for 20 percent of retailers’ revenues (it is as high as 33 percent for jewelers). According to the National Retail Federation, this year it will amount to about $600B in sales—about $82B of which will be online. 
Black Friday occurs during this time period. The origins of the term have been variously attributed to heavy day-after-Thanksgiving traffic and to the day retailers start turning a profit—i.e. they get “in the black.” Irrespective of its etymological origins, Black Friday remains an important day for shopping.
Why do retailers engage in such “huge” sales? An obvious motivation is to drive traffic to the store. But there also is another motive at work—to provide an opportunity to consumers to feel good about their purchases. This has been referred to as the “smart shopper effect”—I feel good if I think that I managed to snare a cashmere sweater at a low price. And hopefully that good feeling will create an image for the retailer in the consumer’s mind. 
We know from the work of Kahneman and Tversky that consumers also derive utility from “gains”—paying a lower price than they expected to pay (their “reference price”). Of course, a concern with this is that the consumer will shop at the retailer only when there is a promotion and not otherwise. Temporally localizing discounting to Black Friday may help prevent an unwanted long-term association between the retailer and discounting.
Retailers follow a diverse range of strategies regarding their Black Friday sales. According to Bloomberg, Wal-Mart is selling a 32-inch flat-screen TV for $98—a set that they were selling for $148 last year. Sears has waived layaway fees and Kmart is introducing a rent-to-own program. Retailers are also opening earlier, or for the first time, on Thanksgiving Day. Gap Inc.’s Old Navy chain is offering a $1 million jackpot for one of the first shoppers to visit on Black Friday.
The 3 dimensions that retailers compete on are convenience, price, and assortment. To compete with online retailers, offline retailers also offer instant gratification and loyalty programs. How offline retailers can manage to do this profitably is the issue. For example, a shopping mall can provide a “basket” discount based on the total amount spent at the mall—with the individual retailers in the basket participating based on their fractions of the basket. One can extend this to purchases over time, thereby making the mall a desirable destination for the customer.
Some ways in which offline retailers have been dealing with the pricing issue are to (a) pre-announce the items on sale; (b) provide a store-specific benefit; (c) offer instant gratification by having the hot items available; (d) sell store-specific branded variants; (e) and “reverse” show-rooming by price matching online stores.
How can online retailers take advantage of Black Friday / Cyber Monday related promotions? Remember, the key is to get the customer to come to your “store”—online or off. Either the customer has a history with the online store and goes there to check out things anyway, or the store needs to make its presence felt—this can happen offline (companies like Overstock and eBay also do offline advertising) or online (via display ads, pop-up ads, search ads, or retargeting ads). 
The one benefit that still accrues to many online stores is that there are no sales taxes for now and as long as shipping costs are low or zero they can still compete on prices. The key then is delivery and making sure that the item gets to the customer expeditiously. Amazon has this covered with things like Sunday delivery (see my previous post). Others still have a ways to go.
Whether the consumer is better off for all this is still up for debate. A recent Wall Street Journal article (“The Dirty Secret of Black Friday Discounts”) pointed out that retailers often work backwards to ensure that they get their margins even at the prices advertised. This means that regular prices are raised and discounts are offered giving the illusion of a lower price. In many cases the retailer may never offer the item at “full price.”
In the words of Rebecca Bloomwood in Confessions of a Shopaholic, “I love new clothes. If everyone could just wear new clothes everyday, I reckon depression wouldn’t exist anymore.” While the effects of shopping on depression are still an open question, the effect on retailers’ health is a lot clearer. A few days from now whether retailers feel healthy or depressed could be revealed!


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