How Do Retailers Sell Things for So Cheap?

Low prices help lure customers through a retailer's door, but prices that are too low can cut into profitability by not bringing in enough revenue to cover costs. Strategies for keeping prices low must be developed with a big picture idea of how to keep your retail business profitable. Many retailers keep can sell things cheaply because they have negotiated low prices from wholesalers. The trick is to generate enough volume to compensate for the low margin of each individual sale, or integrate low prices into an overall pricing strategy that includes other items with higher profit margins.

Retailers often receive discounts for purchasing inventory in volume. This discount means stores can charge lower prices to customers at the retail level. Stores might receive volume discounts on particular items that they sell in large quantity, or they might develop an overall pricing and purchasing strategy for a range of products based on volume discounts. Making a business profitable by successfully purchasing inventory in volume requires finesse and knowledge. If you acquire more inventory than customers will purchase, you will either be stuck with goods that produce no sales, or you will have to drastically reduce prices to move them off the shelves. In either case, your top and bottom lines will suffer.

Retailers sometimes sell particular items at lower margins than the rest of their inventory -- or even at a loss -- to lure customers into stores. The idea is that once customers are in the stores, they'll also spend money on higher margin items. For example, a shoe company might offer a deep discount on socks based on the premise that shoppers will also buy shoes once they enter the store. A retailer who uses this type of strategy is betting that higher margin items will make up for the lower margins on these loss leaders.

Stores with low prices might base their business models on their ability to sell a large volume of product. If you buy 1,000 cups for 80 cents each and sell them for $1 apiece, your gross profit is $200. If you price them at $1.50 each, but wind up selling only 500, you end up losing $50. A retailer that aims to sell deeply discounted products in volume should offer deep discounts throughout its store. In many cases this type of retailer offers a no-frills shopping experience with low overhead and operating expenses.

Just as retail stores mark down inventory that has been on the shelves a long time, wholesalers offer deep discounts to retailers on product that they have overstocked. Chains such as Grocery Outlet base their business model on this "opportunistic sourcing" strategy. It involves building relationships with wholesalers and demonstrating a willingness to be flexible about inventory as long as they can obtain low prices, which they can pass along to their customers. Being flexible means you might have to adhere to the wholesaler's delivery schedule rather than your preferred schedule, or be willing to purchase only certain items rather than make special orders.