Black Friday Deals: Who’s Getting the Short End of the Stick?
On one of the busiest nights of the year for electronic companies, many were shocked to see little crowding during Black Friday mainly due to the new COVID-19 restrictions set in place.
Few malls had lineups, but most remained under capacity. Retail analysts predicted that the majority of purchases would be done online, which has helped offset the low amount of in-store purchases.
However, Black Friday discounts have still been consistent with past years. Many retailers are offering free shipping, BOGO deals, and many more. This begs an important question- are companies making profit off of these deals? If so, how much?
The Black Friday Deals This Year
As I was scrolling through the seemingly endless deals in search of a decent laptop, I noticed a huge price markdown in many different products. Stickers with the words, “$500 off!” flashed across my screen. I thought that surely, this couldn’t be true. Many companies were struggling to stay afloat, if not going out of business due to COVID yet they still could afford to strip $500 off from their profits.
I was curious as to how much companies truly made after their Black Friday deals, so I did some research.
An example of the absurd deals can be found in this picture above. This ThinkPad by Lenovo was originally priced at $3,149.00, yet during Black Friday the price was reduced to $1,259.99. Surely, I thought that they wouldn’t be making profit on this laptop. The price was marked down by nearly 60%.
However, by doing some research on each of the laptop’s components, we can see something interesting happen. The processor that this laptop uses can set you back $300. 256GB SSD of storage is around $100. As well, the integrated graphics can cost around a few hundred dollars. We can’t be too sure about the exact price of this laptop in particular due to the numerous other fees that laptop producers need to pay, (i.e. marketing, supply chain, taxes, etc.) but we can create a close estimate. As well, there are other costs associated with a laptop, such as the battery and monitor.
By using an educated guess, this laptop would probably cost Lenovo north of $900 dollars to produce- leaving the company with around $300 of profit.
Lenovo was able to create a huge discount while maintaining a sizable amount of profit. This is how many companies like Lenovo make money during Black Friday, by pricing their products relatively high and then marking them down significantly during discount season.
Alongside production costs, there are a variety of techniques used by marketers during Black Friday sales. The two most prominent are “Loss Leaders” and “Price Discrimination”
Lose Leaders
The best way to describe a Loss Leader is to look at Costco Wholesale. They are renowned for their absurdly inexpensive Rotisserie Chicken, priced at $4.99 USD. According to Costco’s chief financial officer, the retailer loses between $30 and $40 million a year on the chickens.
Costco is able to price their Chicken extremely cheap as it incentivizes consumers to make more trips to the local wholesale. The chicken is strategically placed at the back of each Wholesale store to “force” customers to view their other products. By lowering the price of their Rotisserie Chicken, they increase the probability that a consumer will also buy a product that creates more profit.
Like Costco, many stores participating in Black Friday offer sizable discounts on their products. However, they compensate by attaching the deals with other, more expensive products. By pricing one product relatively low and the other high, the deal becomes extremely profitable for the company.
In the example above, Lenovo discounted their ThinkPad by over $1,000. However, as you scroll down to place your order you are instantly met with numerous add-ons, ranging from Warranties to PDF readers. These deals create lots of profit for Lenovo as they are often intangible goods. (Products or items which are not physical)
Price Discrimination
Another tactic which companies employ is Price Discrimination. Discrimination refers to the idea that different people are willing to pay different amounts of money for the same thing. To explain this, we can create a scenario with two people.
Sally makes over six-figures with her stable job as an investment banker. On the other hand, Susan makes just enough to get by. Sally and Susan both are looking for a new TV, but due to Sally’s job she is able to buy any TV under $5000. However, Susan can only buy a TV under $1000. Analysts at TV companies can Price Discriminate by pricing the same TV at two different prices to maximize their profits with both Susan and Sally. Price Discrimination is only effective when analysis can recognize their different target markets and their buying behavior.
Using the example of Lenovo’s ThinkPad, their original price was $3,149.99. This price is high enough to create a large profit for Lenovo while still being low enough to attract Sally’s attention. Due to Black Friday deals, the price was lowered to $1,259.99. Likewise, this price still creates profit for Lenovo while attracting consumers like Susan, who make less money.
Eric Mayefsky, a Co-Founder of WEFinance, told The New Economy, “The reason why they aren’t offering [these Black Friday deals] all year round is that they can make more money at other times of the year from other sets of customers… there’s a certain amount of stress and work involved on Black Friday as a consumer and what that means is that you are getting folks who don’t have the money but have the time to participate. Business are allowed to capture value from these customers who wouldn't be able to afford things when they are higher price.”
The Retailer’s Perspective
Spending online on Black Friday this year surged nearly 22% due to COVID-19 restrictions, with consumers spending $9 billion on the web. Companies like Amazon are thriving.
“New consoles, phones, smart devices and TVs that are traditional Black Friday purchases are sharing online shopping cart space this year with unorthodox Black Friday purchases such as groceries, clothes and alcohol, that would previously have been purchased in-store,” said Taylor Schreiner, a director at Adobe Digital Insights.
However, not everyone received the same treatment like Amazon. In 2014, UK high street retailer Argos didn’t find Black Friday helpful to its bottom line (the company’s total earnings) even though they reported a 45% increase in sales. They found that demand was high solely on that day while sales were relatively low for the rest of the week. This is a worrying trend for many retailers as it shows that consumers aren’t willing to buy products unless they are offered significant discounts.
Moreover, Black Friday increases the amount of disloyal clientele. Loyal shoppers are necessary for any business to survive, as they buy the company’s products year-round regardless of the price. Black Friday deals only create temporary shoppers who have no interest in repeat business. As well, Research into the 2014 Black Friday sales in the UK found that 75% of those who shopped on that day claimed to have had a bad experience. In addition, one in four claimed to have later returned what they bought.
The negative interactions that businesses face during Black Friday can actually harm their future sales, by clogging up their checkout lines with shoppers who need to return the products they bought from Black Friday.
Who’s The Winner During Black Friday?
There is no clear cut answer to the winner of Black Friday. Just like the Lenovo Laptop mentioned above, we won’t know the true cost of production for Lenovo, or why they decided to price the laptop the way they did.
Likewise, many companies face harsh consequences due to Black Friday, such as a negative mindset towards non-discounted products. The reality is that Black Friday is amazing for some companies while being a “rip-off” for consumers and vice versa. Both parties possibly are taking advantage of the deals while at the same time, both parties could be getting the short end of the stick — it simply depends on the way you see it.
