Discount versus non-discount.

It's coming out that the big boxes didn't do so well this Christmas.  Lots of discounts hurt the profits, but didn't increase sales as much as they wanted.

Something I don't think most people understand -- you can't simply raise prices or lower prices.  You are either a store whose business model is based on discounts or you aren't.

I would submit that a small independent store is almost always better off not trying to be a discounter.  By the way, we had a record Christmas, without discounts.

If my math is off, please let me know. 

Here's a couple of scenarios:  (Working from round numbers that in no way reflect my actual store.)

Let's say there are two stores.  The first store starts off with 40% margins, but does not offer discounts and doesn't have sales.  The first years average sales per month is 10,000.

The second store starts off with 30% margins, giving their comic subscribers steep discounts and constantly running sales.

Let's say the second store immediately draws more customers, lets say 40% better.  So it does 16,000.

The profit on 16,000 at 30% is 4,800.

The profit on 10,000 at 40% is 4,000.

That's only a 17% difference in profits.

Already, the second store is having to risk buying 11,200 worth of product to get their profits.
The first store only need to buy 6,000 to achieve theirs.  The second store is having to expend more time, energy and space to make their profit.  They might even need an extra employee.

You can already see where this may be heading.

So the first store takes their extra 10% margin and reinvests it in inventory, slowly but surely building it.  The second store had just enough to buy replacement inventory.

So lets say in the second year, the first stores sales increase to 12,000 because of increased inventory.
The second store increases 2,000 too, to 18,000, but still has only 30% margins.

Now the first store has 4,800 in profits.

The second story has 5,400 in profits.  Now there is a 11% difference in profits.

Let's jump ahead 10 years.

The first store has steadily increased its good inventory by reinvesting the 10% extra margin he has over his competitor.

The second store has steadily increased its bad inventory by having to buy greater numbers of product to satisfy the higher demand.  It is buying much more inventory, increasing the gamble with every purchase.  The store is chasing discounts every chance it has.  It has mostly stuck the the periodical material, without trying to create a strong backstock.  In fact, its cash flow is so bad, it constantly runs sales to raise cash, thereby increases the debilitating backstock shortage.  Its customers have become accustomed to higher discounts -- that's why the store exists.  However this makes this store vulnerable to people who offer even higher discounts, and they've actually started to lose customers.  So from the 18,000 per month they were doing 5 years ago, they have now increased by say, 3% a year to roughly 20,000.  They are still stuck at 30% margins.

After 10 years, the first store has constantly added premium product, reinvesting the 10%.  Their sales have increased by 6% a year, to 16,000.

Now the first stores profits are 6400.

The second store's profits are 6,000.  (Even though it's sales are 20% higher.)

But I would submit that this is where the long strong climb of the non-discounting store kicks in.  This store is now fully stocked, and need only keep up its inventory.  Because it is fully stocked, it can now look for bargains as part of its mix.  Most importantly, it doesn't need to build the inventory anymore, but simply make sure that it has a strong backstock.  It can now pocket the extra 10% instead of reinvesting in the store.  It profit margins increase, and is now 50%.   It has now become a "cash" profit.

So the first store on 20% less sales is actually earning 25% more money.  Not only that, it isn't in danger of losing customers to the Internet or the Big Box stores because discounting was never its draw.   Plus making do with less new product, less gamble, less time, space and energy.



Unfortunately, most people can't resist the discounting model, which is too bad.  They see those sales of 16,000 versus 10,000 and think the other guy is an idiot.  The customers see 40% more customers in the discounting store and lower prices and also assume the non-discounter is losing.

But its the business model that counts in the long run.  Not the perception.

If you've taken the time to build your customer base slowly, based on factors other than price, than prices can't kill you. 

Meanwhile, the first store is stuck with its discounting model.  It is working harder and harder to make the same money.