Discount Stores Key Terms

Get the most out of discount stores with this vocabulary primer
By Lisa Maloney From loss leaders to calculating profit margins and shifting customer cost of living, discount stores are an inescapable part of the capitalist economy. While many discount stores market themselves as working for the consumer, their chief concern is still turning a nice profit. This list of basic vocabulary will help you understand the inner workings of discount stores and chains.

Cost of living

Cost of living refers to the baseline cost of living necessities, such as food, water, clothing and shelter. Discount stores often make reducing the cost of living, or increasing customer quality of life through lower cost of living, a part of their mission statement.
Try:  Wal-Mart Stores defines how their business and pricing approach helps to enhance customer quality of life through lower cost of living.

Volume discount

Volume discounts are to discount stores what buying in bulk is for the consumer. Large store chains, especially warehouse stores like Costco and Sam's Club, purchase goods in large quantities and leverage those buying quantities to pay a smaller price for the goods, then pass those discounts on to their customers.
Try:  WiseGEEK explains the concept of a volume discount and how small stores unable to achieve large volume discounts compete with larger stores.

Up-front membership fees

Some discount chains, especially warehouse stores or buyer's clubs, charge up-front membership fees for access to their goods and services. The fees guarantee them a certain level of income, while their sales pitch to you is that access to their discount prices will more than make up the cost of the membership.
Try:  BJ’s Wholesale Club details the benefits of how paying their up-front membership fees actually benefit you in the end.

Profit margin

A profit margin is how much of a company's income is actually contributing to its bottom line. A profit margin is calculated not in dollar amounts, but as a percentage, with net income being divided by revenue. Discount stores often rely on volume of sales, as opposed to high prices, to maintain their profit margin.
Try:  KJE Computer Solutions offers a free online profit margin calculator that allows users to compute what sort of discount they can afford to offer while still meeting their bottom line.

Markup and margin

The retail markup is what percentage of the wholesale price you add to an item to arrive at its resale price. The retail margin is how much of the retail price works out to profit. Note that retail markup and margin are often not the same, the margin usually works out to be a smaller percentage than the markup.
Try:  The CSGNetwork.com gives an explanation of how to compute retail markup and margin, along with a handy chart for quick reference of markups and margins.

Loss leader

A loss leader is an item or items offered at a steep discount, often at less than wholesale price, which means the company actually loses money on each item sold. This is a useful tactic for discount stores because they get the publicity for steep discounts on in-demand products, while selling other products at their usual margin and greater volume because of customers drawn by the loss leaders.
Try:  Investopedia explains how loss leaders are actually of help to stores and companies by getting customers in the door so that they'll purchase other products, which allows the store or company turn a profit.