Time-Sensitive Pricing: Should Supermarkets Mark Down Products?

It is very common for supermarkets to mark down products that are close to their use-by date. Customers see these yellow labels and may even change their dinner plans simply to take advantage of this great bargain - but does it pay off for supermarkets?

Something is better than nothing, many would argue. However, this may not be entirely true. The premise for using markdowns of products close to expiry is that someone will consume more than they originally would have with no markdown. The premise is that someone sees the yellow label and decides to buy more meat than he otherwise would - but this is rarely the case.

The products that are usually marked down are perishable products such as meat and dairy. These products are ones that are consumed very frequently, and are indeed considered necessity-products. And in developed countries, we have the money to satisfy basic needs, and our income is therefore rarely a constraint when it comes to consumption of food. Rather, the constraint is how much we can eat until we feel full, until we reached our calorie-target, or until we can’t fit any more into our freezer.

Neither of these variables change when the price is reduced, so mostly, those consuming marked down products will move consumption from another good to this, i.e. substitute another product for this marked down one. As markdowns are not advertised, it will not attract any customers that did not intend to buy their food in this store either way, and thus it won’t increase the number of customers (unless you become notorious for marking down products).

Essentially, there is almost no way a customer can lose by purchasing these products. Sure, it incentivizes him to buy a product close to expiry rather than one that isn’t, but chances are that he’d have bought a far-from-expiry, high-margin version anyway. Or, at the very least he would have bought some other item to fill his stomach, which wasn’t marked down this massively.

While markdowns can affect the choice of goods (it certainly will!), it is unlikely to significantly increase the quantity of goods that are purchase. What will happen, however, is that the goods chosen will be incredibly low-margin, while quantities remain the same.

Conclusion: Markdowns are doing the customer a huge favour with negligible return.