Retail Economics 101: The Balancing Act

Most of my purchases are based purely upon impulse. Here lately, these impulses have become less frequent (not really), but increasingly more expensive (really)!

As I understand it, during a recession, the goal for most retailers is to maintain their current levels of income or profit. However, this strategy might even be difficult, because input and inventory prices are rapidly rising (manufacturers, distributors, etc are also facing tough times). With this goal in mind and operating costs increasing, it is intuitive to raise consumer prices.

But, according to Meghan O’Brien,  Department of Economics at my alma mater,

…these increases cannot simply or universally be passed on to consumers…Pricing goods based on their elasticity is a smart retail strategy during a recession…the lesson for a retailer is not to raise prices on those goods that your customer can live without or go down the street and purchase in a less expensive form.

Managing inventories at a profit maximizing levels is difficult for retailers in a recession, but critical for success. The wisest retail strategy under the circumstances is to order the minimum necessary to sustain existing demand—an ample amount of staple items, which sell frequently, and fewer of those more expensive, non-essential items. Unsuccessful attempts result in reducing excess inventory via sales and losing consumers to competitors when there is a shortage.


O’Bien’s tips for shoppers:

1. Now is a good time to be a consumer. You might have less money to spend, but retailers want your money more than anytime in recent history. Take some time to shop around for the best prices and services.

2. Your dollar is your vote. If you really enjoy shopping at a local retail store, don’t expect it will be waiting for you to come back if you switch your spending habits.  Choose where you will spend you dollars based on whom you would most like to continue doing business with.

3. Be reasonable about where you travel to shop; try to maximize your savings per trip.

4. Limit credit card use. Retailers may be running great specials but stocking up at 70% off isn’t saving you money if the balance stays on your credit card for multiple billing periods.


O’Bien’s tips for retailers (among others):

1. Don’t assume raising prices will keep your revenue stream stable during a downturn. The price elasticity of the goods you sell will determine whether you can raise prices or not. DO NOT raise prices on highly elastic goods as this will reduce the quantity demanded dramatically! (emphasis added)

2. Listen to your customers; they are your greatest asset.

Based on the article Retail Economics 101: Lessons and Strategies of a Recession


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2 Responses to Retail Economics 101: The Balancing Act

  1. Lots of Good information in your post, I favorited your blog post so I can visit again in the near future, Thanks

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