Question:
In a given state, if wholesale cost for a pack of cigarettes is $2, and the taxes total $3, then the convenience store pays $5 as its cost.
Wouldn't "lowest price allowed by law" be $5 retail, and then the retailer would make no profit?? Or do states mandate a minimum profit percentage for the retailers?
Do they just use that to lure in customers, sell them cigs at cost, and hope they buy coffee, energy drinks, donuts, etc??
Answers:
Hi There,
In many instances throughout the world, the only cost that is constant is taxes. Taxes in many country defy the standard practice of commerce of bulk purchase. I have yet to come across governments giving tax discount on bulk payment. I have seen the more you earn the more percentage you pay income tax.
Therefore cost price will drop if the purchase is bigger and the same will apply for most goods worldwide.
Controlled items in my country have a maximum celling price. Agent controlled items will have its standard retail prices. However during promotional period you may be allowed to offer discounts. Even so or cigarettes.
In life as well as in marketing there is no such thing as a free meal or cheap priced item. Usually there is a hook attached.
I you get to buy cheap ciggarettes, it may be a hook to get you buy some other items in the shop.
That is called purchase with purchase promotion. In your given scenario, most likely they are "spending" their profit margin in cigarettes to draw in customers and hope to gain profit for sales of other items and hopeully build a regular customer base. On the other hand, they may still make a small profit for the sale of cigarettes due to bulk purchase.
Another reason that they do it is probably to clear off stocks that is almost at the end of their shelf life so that they can restock or terminate that product category.
Nevertheless, all the answers are just to help you understand why they did it. The principal learning note here is, the consumers, do they find it a good bargain that they want to buy it there instead of elsewhere?
If yes, then Horray for the consumers.
It sounds like a gimmick. In the United States, its usually permissable for stores to sell their products below cost or even give away products. Some European countries do not allow such practices because they believe that is not fair to other competitors.
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