The world can’t be 70% off forever, right?

Posted on December 3, 2010. Filed under: startups, venture capital | Tags: , |

Lately I’ve been thinking about the roll of discounting, flash sales, deals, and deep discounts in our economic recovery.  It feels like consumers are being trained to spend again, under the veneer of some “new” concept where the entire world is 70% off, and as the purse strings loosen, while individual items may be cheap (er), total volume of discretionary spending is rising.  Soon, if it isn’t already happening, I am guessing price of goods will begin to rise (with aesthetic discounts/deals still in place), and then eventually consumer spending will be strong enough that the 70% off sales are going to start to become 30% off and then eventually disappear.  At that point the market will be efficiently priced, discounts/deals will die, and prices will continue to rise, testing the consumer’s willingness to go higher and higher with their buying confidence now restored.  When the cost of living/goods exceeds consumers’ willingness or ability to pay, without the benefit of loose lending practices to defer the correction and enable continued spending despite a crossing of this threshold, we will again dip into some form of mild recession.  When that happens people will freak out again, say it’s “different” this time, everyone will stop spending, discounts/deals will return, and so on and so on and so on.  I haven’t read a single piece of actual economic data to support this, I have taken half of one economics class and read a little on Wikipedia in my entire life, so I have no idea if this is consistent or inconsistent with macroeconomic principles, but I am starting to wonder if the market’s hysteria and perceived future growth in the “deals” space is not a bit naïve with regard to our macro position in the broader recession/recovery cycle.  The world can’t be on SALE forever, right?

People who are smart on economics, please chime in.

 

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3 Responses to “The world can’t be 70% off forever, right?”

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What you are talking about is inflation. Some inflation is good for promoting spending (it makes it more expensive to save since your money is worth more now than later). Imagine if prices were going down (deflation), you might decide not to buy anything because it would soon be cheaper so you save all your money-and so does everyone else-and the economy stops. It is a tricky balance, though. If I’m a bank and worried about inflation, I might not lend you money since you’ll pay me back in the future when it is worth less.

There is also the notion that discounting is what is driving down our wages. Henry Ford paid his workers more so they could afford to buy his cars, creating demand and a good feedback loop. By paying workers less, things have to be cheaper, so we have to pay workers less. There is a book: “Cheap: The High Cost of Discount Culture” – they talk about it on this NPR podcast last week: http://www.wpr.org/book/091129a.cfm

I also recently read the new Gibson book: Zero History. This deals with the low value people generally put on clothes these days, which means the quality is generally less. To have the quality of a handmade shirt from 1900 would cost hundreds today, but it would also last longer and support a real life instead of a sweatshop slave. Interesting stuff.

thanks Daniel, appreciate the thinking

I think what we’re seeing now is the convergence of multiple trends. First, a good amount of the massive discounting in 08/09 was due to retailers trying to shed excess inventory that they had accumulated in anticipation of high consumer demand. Second, group buying/flash sales sites have been able to more efficiently drive sales/marketing efforts which has allowed them to take advantage of steep discounts (because retailers are willing to take a significant haircut on margins in exchange for guaranteed purchases). The second phenomenon is probably the more interesting/more impactful one in the long run because if group buying/flash sales captures enough of the market then, as you say, prices will converge to a lower bound than they are currently. That said, I don’t think there will be fluctuation as you describe it but rather that traditional brick-and-mortar retailers will have to compete with broader forces of market efficiency b/c the web makes customer acquisition much cheaper/easier. Eventually, web based businesses will probably win out, with only the most efficient/best differentiated brick-and-mortar businesses remaining in place (think: experience-based retail stores like Apple, Lululemon, etc).


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    I’m a NYC based investor and entrepreneur. I think there is one metric that can be used to measure the value of a human life and that’s impact. How did you change things? How many people did you touch? How different is the world because you lived in it and how positive was the change that you affected? (p.s. i don’t use spell check…deal with it) You can email me at Jordan.Cooper@gmail.com

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