Why do outlet stores exist? The answer may seem obvious to most shoppers - they are places where companies get rid of factory seconds or outdated merchandise at heavily discounted prices. In other words: bargains, bargains, bargains. Indeed, that may have been the case when the outlet stores first appeared in the 1930s, usually located in rural areas and selling damaged or irregular clothing.
Even though most garment manufacturing has moved overseas a long while ago, outlet stores have continued to exist. And, far from just selling cast-off merchandise, some companies even design specific product lines for sale there. So what's going on?
Why don't companies just sell this merchandise closer to their customers? Why do some companies have a lot of outlet stores and some don't have any? What's the difference between having these stores and just having a sales rack in the back of stores?
We were fascinated by the incredible range of products that retailers offer to customers, and wondered just how this practice developed. We began to suspect that it had more to say about customers than it did about the companies. Companies must know something about the way customers behave that causes them to adopt these retailing strategies.
Our finding has been helped by the fact that companies are capturing more data on customers than ever before—recording not only demographic information, but also details on every product purchase they make. So much attention is being put on retail analytics that it's like drinking from a barrel. Companies have more data than they know what to do with it.
Do outlet stores cannibalise?
One leading manufacturer in the fashion and accessories category agreed to provide us with customer sales data in return for a detailed analysis of its customers. Behind the company's interest was an anxiety about whether its outlet stores were cannibalising customers from its main retail stores. Outlet stores tell us as much about consumer behaviour as they do about retail strategy.
In the business press, it's fashionable to talk about how going down market to outlet stores damages the brand. Anytime a company makes a foray into outlets, they are going to gain in the short term but damage brand image in the long term. To see if that was the case, we separated customers by a variety of characteristics, revealing that in fact, those who shopped at retail stores and outlets were virtually identical in terms of demographics, including income and post codes. They differed, however, on two important variables: their willingness to travel, and the degree to which they cared about "quality," which in fashion often means the newness of a particular item's design.
We found an almost perfect inverse correlation between the two attributes. In other words, the more likely a customer was willing to pay a premium price for the newest fashions, the less likely were he or she willing to drive a long distance to an outlet and vice versa. People who were most willing to travel happened to be the same people who cared about quality the least. Importantly, that customer behaviour went not only for older items but also for brand-new items produced in older, less-fashionable designs that companies continued to produce for their outlet stores even after they stopped making them for their main stores.
The companies were actually making more of the old stuff, because if they made more of the new stuff for the outlet stores, that would cause cannibalisation. They didn’t want to expand the market to have more lower-value customers at the expense of losing their higher-value customers. By selling lower-quality designs for cheaper prices at the outlets, the companies could avoid cannibalisation of the latest designs at their main retail stores. In effect, the travel distance between the retail stores and outlets serves as a buffer to separate the two different types of customers and maximise profit overall.
Trick or Treat?
By virtue of going to an outlet, customers are revealing something about themselves to the seller. The fact that certain customers drove there, the retailer is going to offer them a lower-quality good. That doesn't mean that companies are "tricking" customers. The fact is, customers win out in the end by having greater choice. From the customer point of view, this allows them to buy cheaper, if less-trendy items at a lower cost just by driving a few hours.
We also used the same data to look at other pricing strategies by companies including the ubiquity of listing items as "on sale" that are almost never offered at the actual price on the tag. A company will offer a £395 jacket for 30% off, but the customer couldn't buy the jacket for £395 even if he wanted to. Rather than deceiving consumers, such pricing actually communicates information about the quality of the item, causing customers to be much more likely to buy a £395 jacket sold for £275 than a jacket listed regularly for £395. In fact, we found, there was an exponential increase in sales the more the "original" price differed from the "sales" price, with no levelling off within the range of prices examined. This implies that these original prices are credible, saying something tangible about the product characteristics to the buyer. There is content in that price, whether or not it is genuine.
Our finding is helping lift the veil on the sometimes mysterious world of how companies price their products and, in doing so, revealing not only what it says about companies but what it says about us as well.
About the authors
Louise Dickson is the General Manager of a Sydney based fashion house, which owns and manages leading brands in the Australian and New Zealand.
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