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    September 2012
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    Is the Horse Dead Yet?

    Ian Whiting

    This will be the last blog about “free lunches” and the supposed good deals they represent! The last item I will tackle are the BOGO concepts – some are Buy One Get One 50% off – some are the Buy One Get One free version.

    There is not time to go into all of the differences and mechanics in one blog, so I am going to pick retail store merchandise. Margins on goods purchased by stores for re-sale range from 500% (and sometimes more) to 200% (and sometimes a bit less if a store chooses to carry what they term as a loss-leader). An average retailer mark-up is in the 300% + range. They use this because they know some items will be returned as defective and some will be returned but can be re-sold. Retailers also have to cover staffing, buildings, etc. – which are expensive!

    In the ideal world, the many buyers working on behalf of the retailers will guess “correctly” about future styles and demand – and well-trained ones get pretty good at it – but no-one bats 1000. The next issues shipment JIT – Just In Time – the manner in which automakers try to function. When customer demand underperforms the buyers’ purchase assessment, inventory remains on hand or in a wharehouse. If JIT shipping is not an option, then very large amounts of wharehouse space is required – particularly for large appliances and furniture.

    Wharehouses are a pure COST item – they never generate revenue and neither does product inventory sitting on a shelf.

    So as in many things, timing is everything. When timing is off – whether demand or shipping, costs are incurred and many times, it is cheaper to sell of items – allegedly at “below cost” to clear mis-calculated consumer demand items or unplanned shipments – hence BOGO came along – but remember the average 300% markup – so even BOGO 50% gives the retailer a 225% markup net over 2 items – so they are still OK. BOGO 100% still gives a profit, although it is down to 150% net over 2 items.

    The point is, sale costs – even 50% off – are built in to their initial costing of items – no-one can get fashion, demand and delivery 100% bang on the numbers – so “fudge factors” are included along the way. Sales that are 60% off are still not $$ losers for the retails – although much better pricing for consumers! Take an item costing $10.00 – the 300% markup places it on the shelves at $30.00, BOGO 50 results in 2 items sold for $45.00 against 2-item cost of $20 – they still have a markup of 225%. BOGO 100 results in 2 items sold for $30.00 versus a cost of $20 – markup is now $150%. An 60% discount takes the $30 item down to $12.00!

    Keep all of this in mind when looking at the next big BOGO sales!

    The MONEY® Network