A few explanations on why certain things in business are so.
Some products say to return them to the manufacturer, not the store, if you aren't satisfied to get a refund/replacement (i.e. deoderants, bathing supplies). Why?
Returning a product to the store makes the company look bad.
- Store wasted money buying the product, can't resell it
- Wasted shelf space, could have been used on a better product (shelf space is a valuable, limited resource)
- Wasted an employee's time to deal with the refund/return
Returning to the manufacturer hides all of this. The store thinks you liked the product, and will keep buying it.
Movie theaters and amusement parks will charge seniors, adults, and children differently. Why?
It's not to be nice. The movie theater wants to charge what each person will pay. The ideal situation (for them) is to do this:
- "Movie tickets are $100!!!" The rich businessmen will buy it, other people walk away in disgust
- "No, no, I'm sorry. They are only $10". The adults pay it, but poorer seniors and children walk away.
- "No, no, sorry folks. For you it's only $5". The others pay.
Using this scheme, they maximize their profits. But they can't do this, so they price-discriminate. Basically, they change the price, depending on how much money each age group has.
Do you think it costs more to show a movie to a senior than an adult? A movie theater that is not completely full is a waste, just like an airplane flying with empty seats. It costs nothing to add one more passenger. They can't fill every show with adults, so they have special deals to attract others.
And this isn't really a "discount". They are still making a profit off everyone. They are just getting a larger profit off adults.
Why do companies give out coupons? Aren't they just going to lose money?
Coupons, sales, discounts and rebates entice you to buy something you might not have bought otherwise.
When you waver between two cereals, but decide to buy Corn Pops because there is a coupon in your basket, Kellogs wins. They still make a profit, despite the coupon.
The same is true for sales: a store can clear merchandise, but also get you to buy something you might buy elsewhere (or not at all). If a company is selling you something, they are making a profit (otherwise they'd hold onto it, or sell on ebay at the fair value :). The exception is liquidation/going out of business sales, where they want to turn inventory into cash very quickly).
What about "Buy 2, get 1 free" deals? Doesn't the company lose?
No. This is a plan to entice you to buy 2 of a product, when all you really needed was 1. But what about the company's profit margin?
- Suppose widgets sell for $1.00 and cost 25 cents to make (75 cents profit)
- You buy 1 widget ( 75 cents profit)
- You use a "Buy 2 get 1 free" and get 3 widgets => Company gets $2.00, it cost 3 * .25 = 75 cents, so $1.25 in profit. This is more than before.
In the second case, the company is making less per widget. But that doesn't matter -- they are making more overall.
This is similar to buying in bulk -- the company gets less profit per item. However, they get higher profit overall. Also, there is a certain fixed cost to create a unit. The marginal costs of additional units may be small, so the company can afford the low profit per unit, because the cost-per-unit is small as well.
They say that when you buy bottled water, you are really paying for the plastic. The water only costs a few cents. The cost of the extra water in a large bottle really isn't important.
What about rebates? Surely the company is losing money. No, for several
reasons
- Most people (myself included) forget/are lazy and don't turn in rebate
- Company can reject rebate application if "incorrectly filled"
- Filling out the application gives the company free research (How old
are you? Income bracket? How did you learn about product?).
- Allows them to get a VALID mailing address to send advertisements. You
have to pick up the check, don't you?
- Takes 4-6 weeks to get rebate. Meanwhile, company has your money.
Congrats, you just gave them an interest-free loan.
- Often you have to turn in receipt/bar code. This probably voids the
return.
Stores can advertise the rebate price, and people will select a product
based on that. When they get to the cashier, they don't feel like finding
something else because it's only a "after-rebate" price. Very sneaky.
Why does the stock market increase when the Fed cuts interest rates? Who cares about the federal funds rate?
The federal funds rate is what banks charge each other for overnight loans. Alone, this is not important -- why does an investor care what banks charge each other?
However, banks also use this rate to set the interest rate of their
accounts, and other interest rates as well. If the federal funds rate
drops, general interest rates drop. [Note: there isn't one specific
interest rate.]
As loans get cheaper (lower interest rate), companies are encouraged to
take loans and expand. This helps boost the economy.
The interest rate isreally the price of money. You can "buy" money now and
"pay it back" later with interest. If money is cheap, companies will get
some and use it.
Why do stores have "the customer is always right"? Why take back an item a customer obviously broke?
The profit on a single item is not large enough to warrant the customer getting angry.
- an angry customer won't shop there again; the store loses hundreds or thousands of dollars in future
- customer tells friends: potentially lose hundreds or thousands from other people
- customer makes a sense: lose business from customers in the store right now
Good service works the opposite way -- people might spread the news. One reason I like Wal-mart is because of their fast return policy: no questions asked. Knowing this, I often shop there, because I know I can return something I don't like. I return very few items, so my business is worthwhile to them.
So, it's best for a store to take a loss and accept a broken item. However, some stores keep track of customer returns, and people who return "too often" can get blacklisted from buying certain things. That customer is no longer worth it to the store.
