Consumers today have almost infinite choices where to buy goods and services.
Millions of web sites like Amazon.com compete with brick and mortar stores for your business.
What has this done to margins? Not surprisingly, margins on the actual goods and in many cases services too are tiny. This is a great win for consumers and is what Capitalism is all about, bringing the best products for the lowest prices in an efficient competitive marketplace.
Smart retailers have found ways to add margin back however. Best Buy is a great example. So you buy that flat screen TV for a great price. You’re psyched to go home and hook it up. Oh wait, you need a new type of cable to connect it. Hmm… it says $20 for a cheap one, $30 for a good one, and $50 for a supposedly great one with thick insulation, gold plating and some patented shielding. Cables are one of the HIGHEST MARGIN ITEMS in Best Buy’s stores. Their cost of goods is tiny, the margin is HUGE. So they don’t mind the low margins on other items. Same with batteries, ‘adapters’ (such as connecting an iPod to your car audio system), fashion cases for iPods and cell phones, and much more. These impulse items are where the big profits are!
Then there’s the big win for retail stores – extra warranties! It’s become a great win-win for the retailers and manufacturers, but frankly it stinks for consumers. The manufacturer offers an inadequate warranty to make the over-priced retailer warranty seem more ‘needed’ and attractive, PLUS the manufacturer is done with their responsibilities to the consumer sooner. So that ‘great deal’ on the flat panel TV, say it was $999, has become $1200 as you add $50 for cables and $150 for an extra warranty just in case.
With computers, Best Buy’s ‘Geek Squad’ charges a FORTUNE for trivial setup services such as wireless connections at home (trivial for anyone technically savvy, impossible for the average person though).
Some retailers sell goods that are harder to ‘add on’ the higher margin items. Clothing sold in large department stores often have floor staff that makes no effort to sell high margin accessories like belts, purses, shoes, scarves, etc. This is where the small clothing stores make a killing.
The first trick clothing retailers do these days is have signs ALL YEAR ROUND saying “Sale” and some percentage “off” on everything. I am amazed how many people fall for this. Just because an item is $30 but some in some theoretical way it would ‘normally’ be priced at $60 does not mean it’s a good deal.
Nevertheless, clothing has become a difficult business unless the store is setup for low margins (e.g., Marshalls or Wal*Mart), primarily because of infinite production. Clothing is made in so many places in such vast quantities and so cheaply that the market is over-supplied and thus prices have fallen. When a pair of underwear costs less than a small bottle of water, something is wrong. 🙂
In summary, infinite competition in retailers, suppliers, and information, has lead to great deals for consumers, but they must be more aware to avoid paying for high margin extras they may not need.