Black Friday: How it works?

by Theodoros Alogogiannis, member of the Economic Issues Teams

Black Friday has gained its reputation as one of the most beloved days of the year, and for a good reason. As Hayes (2020) explains, the term refers to the day after the U.S. Thanksgiving holiday, when numerous special shopping deals and heavy discounts traditionally take place, signalling the beginning of the holiday shopping season. Its name has a very interesting background as it was coined during the 50s by overworked Philadelphia police officers. In particular, they characterised the day after Thanksgiving as “black”, because of their having to work overtime, so as to deal with the large crowds flooding the city streets to gain an advantage over the holiday sales (Hayes, 2020). As for what is considered the biggest shopping day of the year, sales normally skyrocket, while companies view it as a chance to boost their profits before the end of the fiscal year. Indeed, with the passage of time, more people seem to find themselves interested in Black Friday offers, hence increasing total online (and in-person) sales, which in 2020 reached $9 billion in the U.S. alone. But how can companies actually make a profit by selling at such low prices?

This text attempts to explain exactly this; the contradiction between selling at incredibly low prices and still making a profit. Initially, the practice of huge discounts and pricing below cost will be analysed, while its legality will be examined as well. Then its connection with the concept of Black Friday will be highlighted, as well as the consumer reaction towards it. Finally, major Black Friday frauds are to be mentioned, before helpful tips on how to avoid such retail scams are given.

At first glance, the idea of selling any product at a price inferior to its cost may seem really odd. The fundamental goal of every business is to make a profit and in order to achieve that, every purchase needs to be profitable. However, this is not always the case. Francis (2019) mentions that sometimes pricing a product below its cost constitutes an excellent way of bringing attention to the business, which will ultimately lead to a greater number of customers. This, in turn, is bound to produce increased sales on ancillary products; hence driving up the total profit. The concept can be better illustrated using an example. A classic practice of American business owners is to lower the price of turkeys around the holiday season, so that consumers will be attracted to their shops and spend a large amount of money on related items, such as stuffing, alcohol etc. (Francis, 2019).

Nevertheless, it is not always legal to adopt such practices and numerous governments have been proven very sceptical when it comes to the strategy of selling below cost. The problem is that this technique can eventually lead to the elimination of competition and the creation of a monopoly in the market. In that case, as Kenton (2020) states, the practice is referred to as “predatory pricing”. Although it may seem that extremely low prices are beneficiary to consumers, the impact of a monopolistic marketplace can evaporate -or even reverse- any short-term advantages, due to the fact that a single business decides for the price and supply of the product in question. Therefore, before a company can implement an aggressive pricing strategy, it first needs to prove that it has no intention of annihilating competition on the market (Kenton, 2020).

Although Black Friday prices are not generally below cost -contrary to popular belief-, they still pose an opportunity for increased figures. This Black Friday, in particular, was the pinnacle of online sales as a 22% increase was observed in comparison to the same day last year (Shead; Palmer, 2020). Interestingly enough, numerous of these transactions took place via smartphone, suggesting that modern customers use a variety of channels, other than computers, to make their purchases. Albeit, there appears to be a constant tendency regarding the most sought-after products (Zaki, 2020). Specifically, tech goods like content subscriptions and smart appliances remain at the top of the average buyer’s list (Rosmarin; Chen, 2019). In addition, home improvement products and the food & beverage sector also recorded a spike in sales, mainly due to the restriction measures, as well as the convenience of online shopping (Nosto, 2020).

In general, there appears to be an underlying doubt among consumers concerning the validity of Black Friday offers. Sadly, any suspicions prove to be completely justified. Consumer group Which? conducted extensive research on the topic and found that 85% of products were at the same or a lower price both before and after Black Friday. To make matters worse, only a minuscule 1% of total products retained their cheapest price on that day (Walsh, 2020). Therefore, it seems that any time-limited offers on this sales day normally serve as an attraction, rather than an actual price drop.

As a consequence, corporations are given the opportunity to make substantial profits, without the need of spending on advertising. According to a detailed analysis conducted by the company Nosto (2020), online Black Friday sales record an average growth of $1 billion dollars each year in the United States. Astonishingly enough, the 2020 U.S. Thanksgiving period alone, saw an impressive 186.4 million shoppers, each of whom spent an average of $311.75 (BlackFriday.com, 2021). Furthermore, it is reported that consumers use a variety of media to make a purchase. Namely, the majority of visits to corporate websites takes place via mobile phones (67%), whilst clicks through desktops or PCs amount to a mere 28%. This tendency is also evident when it comes to actually placing an order, where the slight majority of customers (54%) use their smartphone, instead of their laptop or personal computer (Nosto, 2020).

In order to get the better of Black Friday sales, someone needs to buy in a smart and well-planned manner. First and foremost, Peachey (2020) suggests that consumers do a bit of research before they opt for any particular product. For example, an item that is presented to be on sale, but can be found at the same price and without special advertising elsewhere, is not likely to be a genuine offer. Second, it is advised to check the price history (there are numerous online tools for that purpose), so as to know which goods can actually be purchased at a smaller amount of money on that day. Last but not least, increased attention is needed, when it comes to comparisons between older and current prices. For instance, a company might cunningly state that a product “was” at a higher price than at the moment. However, this may be partially true as that higher price could have lasted only for a limited amount of time and is under no circumstances representative of the piece in question (Simmonds, 2020).

Taking everything into consideration, Black Friday has traditionally been linked to rock-bottom prices in an endeavour to boost sales and increase productivity. However, this notion seems to be nothing more than a marketing trick as the majority of retailers hardly make any special offer on that particular day. For this reason, it is utterly important that consumers invest time in researching and comparing prices among various suppliers before buying so that they make the most profitable purchases possible.

Bibliography

[1] BlackFriday.com 2021, Black Friday History and Statistics, Available here.

[2] Francis, S. 2019, “Is Pricing Below Cost Ever a Good Idea?”, Strategic Pricing Solutions, Available here.

[3] Hayes, A. 2020, “Black Friday (Holiday Shopping), “Investopedia”, Available here.

[4] Kenton, W. 2020, “Predatory Pricing”, Investopedia, Available here.

[5] Koetsier, J. 2019, ‘Record Black Friday Sales: 14% Growth To $7.2B In Digital Revenue’, Forbes, 2 December, Available here.

[6] Nosto 2020, Global Black Friday Statistics for 2020: What You Need to Know, Available here.

[7] Peachey, K. 2020, ‘Most Black Friday products ‘were same price or cheaper’ beforehand’, BBC, 25 November, Available here.

[8] Rosmarin, R. & Chen, C. 2019, “The top 20 products Business Insider readers bought on Black Friday this year”, Business Insider, Available here.

[9] Shead, S. & Palmer, A 2020, ‘Amazon says this year’s holiday shopping period has been the biggest in its history’, CNBC, 1 December, Available here.

[10] Simmonds, E. 2020, How to avoid fake Black Friday deals, Which?, Available here.

[11] Thomas, L 2020, ‘Black Friday 2020 online shopping surges 22% to record $9 billion, Adobe says’, CNBC, 28 November, Available here.

[12] Walsh, H. 2020, 85% of Black Friday product prices aren’t the cheapest they’ve ever been, Which?, Available here.

[13] Zaki, Z. 2020, ‘Black Friday hits new record: Report’, ABC News, 28 November, Available here.


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