The common assumption is that retailers stock up on goods and then mark down the ones that don’t sell, taking a hit to their profits. But that isn’t typically how it plays out. Instead, big retailers work backward with their suppliers to set starting prices that, after all the markdowns, will yield the profit margins they want.
The red cardigan sweater with the ruffled neck on sale for more than 40% off at $39.99 was never meant to sell at its $68 starting price. It was designed with the discount built in.
Buyers don’t seem to mind. What they are after, especially in such a lackluster economy, is the feeling they got a deal. Retailers like J.C. Penney Co. JCP +7.69% who try to get out of the game get punished.
“I don’t even get excited unless it’s 40% off,” said Lourdes Torress, a 44-year-old technical designer, as she browsed the sale racks at Macy’s Inc.’s flagship store in New York on a recent afternoon.