What the Rise of Off-Price Retail Can Teach Us About Human Behaviour

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While certain parts of the retail sector like department stores continue to struggle off-price stores such as TJ Maxx, Nordstrom Rack and Ross Stores are thriving. Moody’s predicted that operating income for off-price retailers would grow by 7% in 2017 and by 5% in 2018. Operating income for department stores in contrast were expected to decline by 9% in 2017 and by 3% in 2018.  At first glance this seems to go against conventional wisdom.  Nordstrom’s department stores are beautifully curated almost like works of art with the best service in the industry.  Walk into an off-price store and sometimes it seems as if you are witnessing the aftermath of a tornado.  Clothes are everywhere, shoes of every size are scattered across the floor and at times it can be hard to find anyone to help you.  But value, fear of missing out (FOMO) and experience keep customers coming back for more.  

Value Trumps Everything  

Off-price stores sell goods at significantly less than regular price. Nordstrom Rack for example, sells brands at 30%-70% off.  These discounts give customers access to designer goods that they would normally not be able to purchase.  Even if someone has a small budget they can find items that make them feel as if they can afford a wardrobe that is several times more expensive and better quality. That is a value proposition that is hard to beat.  For millennials who can still remember the great recession this is a value proposition that they find appealing.  Millennials also earn 20% more than their parents did and have significantly more student debt.  At the end of the day everyone loves the thrill of a good deal. People also crave the feeling that comes along with the bragging rights someone gets on Monday morning when they walk into the office and talk about how little they paid for their brand-new dress. 70% off a Jason Wu dress, now that’s going to feel good for a while. 

Fear of Missing Out

Inventory in off-price stores turns very quickly and there are often limited quantities of each item.  The red dress someone takes a look at on a Tuesday may not be there when they go back into the store on a Saturday to buy it.  In a social media age where everything seems to happen so quickly no one wants to feel as if they are missing out.  Everyone wants to feel as if they are in the know.  Off-price stores have mastered the art of getting customers to go back to their stores often by instilling the fear that if they do not come back soon they might miss out on buying an amazing pair of shoes at 60% off.  Traditional department stores could learn from off price stores who continue to drive traffic by instilling a sense of urgency in the minds of customers.  

Human beings also crave novelty.  Think about the latest hot new store in your area.  For the first few weeks perhaps months there may have been line ups to get in but a few months in it feels like any other store in the area.  Off-price stores have mastered a formula that keeps customers coming back by institutionalizing novelty.  Customers can always be assured that there will something new in stock, enticing them to check back in. Unlike the not so hot anymore store in your neighbourhood off-price stores always have hot merchandise that needs to be purchased before its gone. 

Experience is King

According to eMarketer, 94% of internet users said that a consistently good customer experience is the number one reason for a customer to be loyal to a brand versus 57% that said regular low prices. What makes a great experience? Is it the elevated experience offered by the Ritz? A lot of retailers have invested millions to create beautiful stores but off-price stores have effectively been able to get customers coming back for more in stores that are not the most visually appealing.  Part of the reason is that these stores can be fun to shop in. Hunting for a size 8 in a pair of red pumps can get any die-hard shopper’s adrenaline going.  Add a couple of friends and the experience is similar to girl’s night out without the drinks.  Shopping in one of these stores is the adult version of an Easter egg hunt. With focus, determination and an eye for style customers can walk away with much more than they were expecting when they got to the store. It looks like off-price has brought good old bricks and mortar shopping back into the mainstream.

Thinking about in-store experiences that create a sense of urgency, excitement (like a treasure hunt) and good old value can go a long way in tapping into the deepest of human desires.  

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Sources

https://www.ft.com/content/990c0133-3eb5-37e7-bb86-3e07f4af7829

http://www.businessinsider.com/nordstrom-rack-store-photos-2017-6#overall-the-shopping-experience-at-nordstrom-rack-was-pretty-pleasant-its-fun-to-sift-through-racks-of-products-to-find-the-real-gems-that-are-available-if-nordstrom-can-keep-its-selection-fashionable-and-current-in-rack-stores-its-a-good-sign-for-the-brand-its-a-lot-more-appealing-to-shop-here-than-at-its-full-price-stores-where-you-are-paying-much-higher-prices-for-comparable-products-17

https://www.usatoday.com/story/money/2017/01/13/millennials-falling-behind-boomer-parents/96530338/

https://retail.emarketer.com/article/price-alone-wont-drive-consumer-loyalty/59ea3cf6ebd4000aa48d8e93

Tricia McKinnon