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.
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.
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.
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.
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.
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.