Why do many department stores seek a markup of about 30 percent when some discount houses operate on a 20 percent markup?
There are reasons why department stores charge more than discount stores. First, department stores generally have higher overhead costs associated with operating their business. Many department stores seek to cater to middle- and upper-class customers who are looking for brand-name merchandise. That merchandise costs more to stock, and also carries a higher price tag as much for psychological reasons as for any other reason. Believe it or not, there is no shortage of consumers who feel that they are buying a better product based solely on that item's higher price and logo. Some consumers simply prefer the cachet of adorning themselves in higher priced, brand-name goods when cheaper, generic versions are available at lower-cost stores.
In contrast to department stores, discount stores target a demographic that wants lower-cost items and is not particular about so-called prestige factors like labels associated with higher-cost items. To such consumers, a pair of athletic shoes that bear the Nike "swoosh" is less important than a cheaper pair that will do the job without breaking the bank. Discount stores stock such items because that is what their clientele wants. In addition, discount stores carry less overhead than upper-scale department stores. They generally pay their employees less, spend much less on adornments than do department stores.
The importance of overhead costs cannot be overstated. Department stores often anchor shopping malls and occupy very expensive real estate. Discount stores, in contrast, are often situated in less-affluent areas and occupy less expensive real estate. The costs associated with leasing space at a major mall as opposed to a more distant, less attractive plot alone can account for product mark-up differentials. Department stores usually have larger staffs with higher hourly wages and salaries, carry more overhead, occupy more expensive space, and offer more brands associated with middle- and upper-class values. All of these factors can account for the higher mark-up for merchandise.
There are several reasons why department stores have a higher markup than discount stores. The first stems from the idea that department stores serve higher-end clients who want the experience of shopping in a luxurious store. Department stores are usually located in higher-end retail areas and offer more pleasant shopping experiences than discount houses do. For these reasons, consumers expect and even want to pay more in a department store. In addition, department stores have higher costs; their real estate is usually pricier to rent than that of discount stores. In addition, department stores have costs related to advertising and marketing that discount stores do not always have. As a result of their higher costs, they have a higher markup on their products.
The most likely reason for this is that department stores see themselves as more prestigious than discount houses. For this reason, they both want to and can charge higher prices. The department stores want to charge higher prices so they can make more profit. They also want to charge higher prices because many customers equate a higher price with a more better value product. They are able to charge these prices because they have a more desirable good. Customers feel that it is acceptable to pay a higher price at a department store because they feel that they are getting a superior product.