Dollar stores are a billion-dollar industry. Here's how they get customers to spend more money.
- Dollar stores make billions. In 2018, Dollar Tree made $22 billion in revenue, and Dollar General's stock was worth $36.5 billion as of July 2019.
- The stores are designed to get customers to spend more money, from keeping product sizes small to stocking private-label goods.
- Dollar stores also tempt customers who like the feeling of finding a good deal.
- On average, a new dollar store opens in the US every six hours.
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Following is a transcript of the video.
Narrator: Dollar stores might seem like a great way to save money.
Just look at this battery pack for a dollar! And this toothpaste, also a dollar!But before you rush to the checkout, take a closer look at the brands and sizes. They're different from what you'd see at a local CVS or a Walmart.
And it turns out, those are just some of the sneaky ways that dollar stores get you to spend more.
Priya Raghubir: I would definitely say a dollar store is like treasure hunting. Because you are looking for that rare gem, you know, maybe it's picture frame that would normally cost you $4.99 and you get it for $1.99.
Narrator: And this treasure hunt intentionally happens in a small space. Overall, dollar stores tend to be smaller in size. A typical Dollar Tree, for example, is just 8,000 to 12,000 square feet. That's roughly one-eighteenth of the size of the average Walmart.
This makes for an easy shopping experience where you can quickly go through the entire store, increasing your chance of seeing something else that might strike your fancy.
Their inventory setup is also strategic: Seasonal products are placed in the front, so you're tempted by the newest products right away, most of which are single-use items like holiday-related party supplies, while the most popular items are placed in the back, so you have to walk through the entire store to get to them.Family Dollar, for example, puts all the food and toys in the back.
And these tactics are all part of a dollar store's strategy to get you to buy more while you're there. In marketing, this has a term. It's called the momentum effect.
Raghubir: It's a super interesting effect which essentially shows that if you buy something which is really cheap, then, after that, the likelihood of your buying something else that is more expensive increase. So, shopping creates a momentum.
Narrator: So, the more things you see as you pass by, the more you'll likely purchase. Small impulse buys, like candy and ChapStick, are also available at the registers to tempt you during checkout.
But getting you to buy more per visit isn't the only tactic. It's also the frequency of visits you make.
Take that $1 tube of toothpaste. Here's a Colgate toothpaste we bought at CVS compared to the same one from Dollar Tree. These smaller products keep prices low but also mean you'll need to replace them more often, which means more visits and even more spending.
Plus, it's ultimately cheaper to purchase household supplies like toilet paper or detergent in bulk, something you won't really find at any dollar stores. A six-pack of toilet paper at Dollar General costs $3, which is $0.50 a roll. Whereas if you order a 24-pack on Amazon for $5.48, it comes out to $0.23 a roll. Compound that with how much toilet paper the average American uses each year, and that's about $38 in savings for buying in bulk.
In addition to size, brands are another thing that keeps customers coming back, but not in a good way.Raghubir: I would say the general psychology behind dollar stores is to look for consumers who are interested in a bargain, bargain hunters. These are called deal-prone customers.
They're customers who are not very brand-loyal, but will, for example, buy whatever brand is in a store which is on deal because they believe that that is, you know, they're getting a really good deal.
Narrator: And, at first, a $1 pack of AA batteries look like a bargain next to a $7 pack from CVS.
The dollar-store batteries, however, are more likely to leak, according to Kiplinger. And because they are made from carbon and zinc, they don't last as long as name-brand alkaline batteries from Energizer and Duracell. And once they die, you'll have to go buy more.
Part of the reason dollar stores like Dollar General have more off-brand, private-label products like this is because it gives companies more control over manufacturing costs, so they can set their own prices. But as we've seen, it's not always as great of a deal as it first appears.
And yet, dollar stores are only getting more popular. In the US, a new dollar store opens, on average, every six hours. And according to the Institute for Local Self-Reliance, there are more dollar stores than there are Walmarts and McDonald's combined.
Part of what makes them so successful is location. Big dollar-store companies target low-income neighborhoods where people don't have the disposable income or resources to purchase in bulk or higher-quality technology. Dollar General's core customer, for example, is from a household making $40,000 a year or less.
And while it's not always the best deal for customers in the long term, dollar-store companies are thriving. In 2018, Dollar Tree made more than $22 billion in revenue. And Dollar General's stock is worth $36.5 billion, five times as much as Macy's current value.
And part of all that success is how dollar stores make us feel.Raghubir: Whenever consumers feel they have a bargain, they feel that they are smart shoppers. That makes them feel extremely happy. So, that is the key appeal of a dollar store. I think you can find good bargains there.
But, then again, if you think about whether dollar stores are a good deal in pricing, I think everything may not be priced at the cheapest price you could find it.
Narrator: So, just remember, sometimes deals are, in fact, too good to be true.