Starting a Small Business
The Pound-Store Phenomenon
Did you know that Marks & Spencer originally was the equivalent of the Pound Store? Over a hundred years ago, it was!, except that it was a penny per item rather than a pound; though back then a penny would have seemed similar to a pound to the average shopper due to the periods of high inflation in the meantime.
The pound-store became popular in the early 1990s recession and has had massive growth ever since. The latest recession that started in 2008 has seen phenomenal growth in this retail sector. Why is this the case? I go into them fairly often to get things like pads of paper or WD40 or suchlike, which can cost twice or three times that in stores like WH Smith.
There is an element I reckon of trying to see the bargain in there. We consumers are a competitive bunch and you must have known more than a few people who excitedly announce “guess how much I got this thing for”. The standard reply would be to flatter their bargain-hunting prowess and exclaim “ooh, at least ten quid” and then they say “No, it was £1.50, I couldn't believe it!”
I think there is plenty more mileage in the pound-store format. I can see them moving much more into the realm of books, CDs, computer games and essentially anything that has a low production cost.
I know that (perhaps surprisingly), the profit margin at Poundland (the largest chain of pound-shops in the UK) is surprisingly (for me anyway) high. I heard the Marketing Manager interviewed on the BBCs amazing business show “The Bottom Line”. He didn't disclose the profit margin, but he alluded to the notion that it was at least 40% (on average). Some products are a lot higher and some far lower (acting as regular purchase “loss-leaders”).
The phrase “loss-leader” does not strictly mean that it makes a loss, but more likely that the profit margin is very tight so as to attract customers into the store. It is a marketing strategy that works very well. The budget airlines are major proponents of this tactic. They are however very skilled at getting their profit in some way or another with extra add-on services “we charge £30 for not dumping you in the middle of the Irish Sea” type of luxury add-on.
The pound shop format has a number of unexpected benefits to the retailer too. There's no need to price things up in their shop. There's no management time wasted on thinking of prices.
Customers can easily calculate how much their basket of goods will cost, and payment at the till is quick with cash. There may be some items that could be purchased cheaper elsewhere, but the consumer is not particularly bothered about saving the odd 15 pence it seems.
The loss-leader is one of the most potent tools in the business tool-box and you might need to do this especially if you're in retail or catering. It is very important to get people through the door or bums on seats. It's a psychological thing aside from anything else; people go where other people are.