Three for the price of two

These special offers are particularly common with toiletries, which is the sort of thing you don't buy every time you are at the supermarket (toothpaste, soap, deodorant etc) because they last for weeks or months. You note when something is running out and buy another one when it does.

These offers still make good sense for the retailer, because the biggest single item of cost is the storage/display. While stuff is on the shelves (or in the warehouse ready to go on the shelf), it costs money in terms of cash tied up, rent and rates, heat and light, insurance, pilferage. Food goes off quite quickly, so if a bag of carrots costs 30p wholesale and is no longer saleable after a week, the holding cost of that bag of carrots is 4p per day, but let's stick to toiletries.

To illustrate the principle and using arbitrary figures (this is primarily a maths problem), let's assume something retails for £1 (net of all taxes), costs 30p wholesale and that the retailer has to make a minimum margin of 20p per unit to cover all fixed costs (head office, computer system, advertising, red tape, net profit/return on capital etc).

Let's further assume that storage/display cost of the item is 2p per day and it normally stands on the shelf for 25 days. The retailer's margin is selling price £1 - wholesale 30p - [25 days @ 2p storage] = 20p, by the time you have bought three of them, he has made 60p margin.

If he does a 3-for-2 offer, people will think great, it wasn't really time to buy another bar of soap or tube of toothpaste yet, but I've enough space for three in stock in my bathroom cupboard, and people will buy them in advance. As long as the items now only stay on the shelf for eight days, the retailer is home free:

Selling price £2 - 90p wholesale - [3 x 8 days @ 2p storage] = 62p margin.

Obviously, the retailer can achieve one of two things: he might sell more stuff from the same retail square footage; or he might require less square footage to sell the same amount of stuff, it comes to much the same thing in the end.

The calculation is quite marginal. If the item is never sold singly for £1, only in batches of 3 for £2, then that becomes the new normal, and the eight-day turnaround period for the special offers will creep back up to a much longer period (no more impulse buying). Even if the period only goes up from eight to ten days, that 62p margin turns into only 50p margin.

So that is why the retailer does this sporadically and seemingly at random. This week it's toothpaste on 3-for-2 and he shifts enough toothpaste for everybody for the next ten weeks. And next week it's 3-for-2 on toilet rolls, or deodorant, or soap, or vitamin tablets or whatever, so next week everybody buys enough toilet rolls or whatever for ten weeks, each time thinking that they are getting a bargain, which they are for the simple reason that for the next ten weeks they are paying for the storage of those goods.