Black Friday was born in the USA, but recent years have seen the sales event become a phenomenon in Europe. Across Belgium, France, Germany, Italy the Netherlands, and the UK, sales on Black Friday are now over double the daily sales in the first half of November.
Below, Oxera Senior Consultant Tim Hogg explains that this rising trend is due to a blend of consumer behaviour and commercial strategy.
Behavioural economics tells us that we rely on mental shortcuts to solve problems and make judgements more efficiently. While these shortcuts (or ‘biases’) are an efficient way of getting around our cognitive limitations, they mean that the way choices are ‘framed’ affects our decisions.
Understanding shortcuts and biases enables us to predict how and why consumers make the decisions they do, and why they act as they do, with greater accuracy.
Scarcity, framing and herding
Three biases in particular can help to explain why Black Friday has been so successful.
- Consumers tend to perceive a product as more valuable when supply is limited, because they are averse to losing out. Black Friday appeals to scarcity bias through an inherent time limit (many deals are available for one day only) and finite stock quantities (such as text reading ‘Only 3 of these left!’ underneath a product on an online store).
- Consumers tend to evaluate prices based on reference points, with prices being more attractive when they appear to be discounts or a ‘sale’. Black Friday appeals to framing through presenting prices as special discounts on their headline prices.
- Consumers tend to be influenced by the behaviours of others, and therefore they sometimes follow the herd. Black Friday appeals to herding as consumers flock to get the best deals en masse. This herding is reinforced through social media and news coverage—such as this famous video of crowds fighting to enter a retailer on Black Friday 2014.
Other biases may also be relevant, including the sunk cost bias (consumers may be more likely to buy something if they have queued all night to get into the shop) and confirmation bias (consumers may expect that Black Friday prices are good deals, and therefore don’t take in information that implies otherwise).
How do firms react?
In response to consumer behaviour, firms may choose to offer Black Friday deals because:
- they can increase sales (and therefore cover more of their fixed costs, even if their marginal profitability is lower than at other times of year due to discounts);
- they can acquire new customers (who may then buy more of the firm’s products in future);
- they can offload old stock (which may have been discounted in any case).
However, firms face competitive pressure on their marginal profitability on Black Friday (as competitors may also lower their prices).
Also the overall impact on a firm’s profitability could be negative if its customers merely shift their purchases from that firm from other times of the year (as opposed to making incremental purchases).
Therefore, firms face the incentive to appeal to Black Friday shoppers through headline discounts but also minimise any negative impact on profitability through upselling additional products (with smaller or non-existent discounts).
As the field of behavioural economics evolves, it offers valuable insights to firms looking to innovate and capitalise on consumer trends.
Firms don’t always get it right. For example, recent research from Which? has showed that a high percentage of Black Friday ‘offers’ are actually worse deals than consumers can get at other times of the year. Likewise, there are other factors to consider—such as the day’s impact on the environment.
These issues require careful consideration, and cutting-edge behavioural economics can help firms to navigate the seemingly impossible trade-offs.