The Hidden Cost of Holiday Discounts

By Derek Thompson

One of the benefits of a bad economy for folks who have money to burn is that desperate retailers are going to great lengths to slash-slash-slash their prices. This year, for example, Black Friday is starting not only a few weeks early, but a full month early, according to the New York Times:

Both retailers who have had tepid sales lately (Wal-Mart Stores, Sears) and those with rising sales (Amazon, Target) are pushing the tradition [Black Friday] forward in a bid to snag shoppers' limited money. Recession-trained customers are also pushing the stores to offer big deals now or risk losing out to competitors, though there is some skepticism about how significant some of the early discounts are.

It's interesting to think about the gamesmanship here, and how it could backfire. Black Friday creep follows a clear economic logic. If your competitor offers "December Holiday Prices ... in October!!" you have to follow those discounts with price cuts to stay in the picture. But at some point, the race to buy foot traffic becomes counter-productive. Discount-upon-discount trains consumers to save until they see another special sale -- at prices that don't return a profit to the store. Number-of-sales increase, but sales numbers, bottom lines, stay flat, which forces the retailer to cut costs by shifting to part-timers and laying off staffers.

It's been said before, but bears repeating: There is a hidden cost to low prices.


This article available online at:

http://www.theatlantic.com/business/archive/2010/10/the-hidden-cost-of-holiday-discounts/65329/