Several retailers are throwing core principles of microeconomics and traditional retailing thinking overboard, and reaping great bounties in the process.
Should we say farewell to the anchor concepts of “Supply and Demand” and “Scarcity and Choice?”
Principle #1: Make it easy to shop.
At your local grocery store you know exactly where the paper towels are located. Paper towels, along with milk and other staples, are located toward the back of the store, requiring you to walk past other items. They're always in the same location.
At Costco, paper towels change locations, every week: You have to actively search to find them.
Costco refers to paper towels, and other key items, as "triggers."Shoppers must search the store for triggers, exposing them to a greater number of products. This is a "treasure hunt" in Costco’s lexicon. And Costco charges you a membership fee for the privilege to hunt and buy.
“Costco rotates upward of 25% of its hard-goods and its products inside the racetrack as triggers. The result is that, of the 3,600 items for sale, a full 1,000 may be offered only for that particular moment and may not be available upon a future shopping visit.” - Fast Company.
- At Macy’s, you can purchase Michael Kors handbags, in a wide assortment, every day.
- At Ross Stores, you can buy Michael Kors handbags, in some styles, occasionally.
- At Costco, you will rarely see a display of Michael Kors handbags, and when you do, it will only be available for a few days or weeks. Buy them while you can.
One Billion French Fries Can't Be Wrong
Principle #2: Offer a wide, yet reasonable, range of choice.
- Walmart offers 136 varieties of ketchup, including condiment packs.
- Costco offers 1 choice in ketchup.
- Macy’s offers 1,130 choices of men’s dress shirts, Costco has 26. And, Amazon offers over 4,100 options.
- In Calvin Klein dress shirts alone, Macy’s offers 133, Costco has 9, Amazon has 301 choices.
- Overall, the typical Walmart carries roughly 150,000 SKU’s (style, size, color options), Costco carries fewer than 4,000.
H&M, Zara and other “fast fashion” retailers have narrow “curated” assortments of product which appear and disappear quickly, reinforcing the urgency to “buy now.”
Curated assortments make purchase decisions easier.
Wide assortments work best when valuable information and assistance is available. Most retailers have culled their in-store employee base.
Principle #3: Make sure you have enough inventory.
A timeless department store adage,
“Have every item available, in every size and color, every day, in every store.”
Department stores are often criticized by financial analysts for being “out of stock” in “basic” items, resulting in poor economic performance.
Limited inventory creates a sense of urgency.
Carol Meyrowitz, CEO of TJX, parent company of Marshall’s and TJ Maxxwrote in the Harvard Business Review,
“We don’t want to be deep in any one product, and we don’t try to carry every size or every style of an item. Customers come to our stores to find something surprising and special at an outstanding price—what we call the wow factor. When they find it, they feel compelled to buy it right away, because they know that particular item probably won’t be there the next time they visit. Our merchandise assortments turn over very rapidly.”
Costco, Marshall’s, Ross Stores and Amazon.com are cleaning up by messing around with “Supply & Demand” and “Scarcity & Choice.”
Costco revenues run about $1,100 per foot. T.J. Maxx and Marshall's rake in about $304 in average sales per foot, while Ross does about $288. At Macy'ssales average $158, and, at J.C. Penney sales per square foot is about $101, according to data from eMarketing. Although, it is hardly fair to compare stores that carry food and drugs with those that sell apparel and home goods.
Don't Confuse The Customer.
Recently, nestled vertically and adjacent to women’s dresses and designer handbags, Ross Stores featured a kayak. The boat wasn’t a prop, it was for sale. One customer stated on Yelp,
“I have no idea why Ross is selling that Kayak, however at $135 I’m buying it for my family before it’s gone.”
And, that customer will undoubtedly come back to "hunt" some more.
Apple, the exception that proves the rule?
Apple Stores amplify this discussion. Apple Stores have only a few hundred items to choose from. The shopping experience is easy, innovative and enjoyable. Yet they infamously run out of new iPhones, iPads and other new products, each time they launch. Apple takes “reservations” for new products, and the Apple Watch was not even available to purchase in stores, for several months.
Whereas Michael Kors handbags vary in price by channel of distribution and promotional cadence, Apple products are the same price everywhere, everyday, worldwide.
Narrow assortment, limited availability, large demand: Apple acts as a luxury retailer. And, Apple registers sales at a staggering $4,798 per foot.
Scarcity means that resources are limited, and because resources are scarce, people must make choices. Economics is a science that studies how people use scarce resources to satisfy unlimited needs.
Supply & Demand:
This microeconomics model concludes that within a competitive market, the price for a particular good will vary until it settles at a point where the quantity demanded, at a given price, will equal the quantity supplied, at the same price, resulting in an economic equilibrium.
Costco keeps their assortment down, inventory rarely available, yet prices are always low.
Ross Stores, Marshall's and TJ Maxx keep their assortments low, changing product assortment and even brands constantly, and prices are always low.
Amazon.com keeps their assortment huge, inventory always available, and prices are competitive to low. And, for Prime customers Amazon offers free next day, or even same day delivery.
Apple keeps their assortment down, inventory low at new product launch, when demand is greatest, and prices are always high.
Scarcity and Choice: The Paradox
Although it has long been the common wisdom in our country that there is no such thing as too many choices, as psychologists and economists study the issue, they are concluding that an overload of options may actually paralyze people or push them into decisions that are against their own best interest.
Too much choice may perplex a shopper, particularly when there is little sales assistance to provide information.
The Paradox of Choice - Barry Schwartz at TED
When less choice means more sales and a lower supply of goods increases demand, yet lowers the price, we have a divergence between established principles and retail success.
With innovative new business models, several retailers have disrupted the status quo and challenged well-established principles of retailing and economics.
Welcome to Treasure Aisle, where the rules don't apply and customers love to shop.
(c) David J. Katz