POWER OF DISCOUNTING

INTRODUCTION

The Power of Discounting ! If some wants to have in-depth knowledge about the legendary entrepreneur then you are in the right place. Importantly, the journey of a businessman who went from being an ordinary salesman to becoming a retail billionaire is being deliberated upon.

A lay man who commenced his business with a small loan from his in-law's and built so much wealth out of it, that today his family is worth more than $215 billion. This iconic businessman is none other than Mr. Samuel Moore Walton, the founder of retail conglomerate giant 'Walmart'. As of today, Walmart is so massive that Americans spend $46 million  at Walmart every single hour, then one could calculate for a day and for a year.

Notably, Walmart employs about 2.2 million people and in 2020 alone Walmart generated a profit of $1.5 million every single hour. To one's awe the question is, What was so special about Sam Walton that he was able to build himself such a humongous business empire? Most importantly, as any one being an aspiring entrepreneur the lessons need to learn from this legendary businessman is mandatory.

2. SYNOPSIS

This is a tale which dates back to the late 1940s in the United States of America,  when World War II had just ended and repercussions of post-war was pondering, the economy was in bad shape and the Walton family  was struggling to make ends meet in a recuperating economy. Since his family was not well-off, Walton throughout his teenage and early twenties had to work at multiple jobs just to pay for school and college fees.

Subsequently, he sold newspapers, worked at retail stores and even waited tables. Notably,  because of the nature of his job he had to interact with a lot of people from diverse backgrounds. Further, through the conversations and interaction Sam Walton was able to comprehend the operations of various businesses playing in the market. In fact, while he was working at a retail store, he used to go the extra mile and study the rest of the prevailing competition, although it was never a part of his job.

Importantly, Sam Walton's ability to go the extra mile enabled him to understand and imbibe the retail market. The moment Sam Walton gained enough confidence took up a franchise of a retail chain from Ben Franklin, from a little money saved and a bit  borrowed from his father in-law. This was his maiden retail journey. Now, just like with any other franchise model even with Ben Franklin, he had a lot of restrictions in procuring  products of other brands. As per franchise agreement he had to buy 80% of the products from Ben Franklin to get a rebate and had to spend a certain amount on advertising. Further he had to hire manpower to run the business, finally he earns 6 to 7 percentage profit with a revenue of only $72,000 annually.

Undoubtedly, right in front of him was his competitor who was generating a revenue of $1,50,000 per year and this flamed the fire in him. This zeal pushed him and from the next day onwards he started visiting every single store in town and spent hours at his competitors' stores. Mention to be made, a few store owners even used to get creeped out because Walton was acting as if he was trying to dissect their business and as if he was trying to steal some business secrets or traits. Absolutely, carrying out the tedious process of examining the competitors and studying the retail market, Sam Walton imbibed three very important business modules  that enabled him to become the richest man in America.

3.         THREE IMPORTANT BUSINESS MODULES 

i)  THE POWER OF DISCOUNTING

Discounting is a technique of selling products at a lower margin in order to maximise the volume sales. For example, if 100 T-Shirts are sold for $3 each with a profit of $1 then the total profit is about $100. But if the same T-shirts are sold at $2.5 although the profit is only 50 cents the volume of sale used to shoot up to 200 T- Shirts. Now, although this might sound like the same $100 profit it had some incredible benefits that very few people realised.

The first benefit was that discounting resulted in more volume in sales which resulted in more people bringing products at the store and hence resulting in more footfall this led to more sales.

ii) THE INVENTORY MOVED IN A FLASH

Being a retailer who can quickly sell available stock of T-shirts and can get new T-shirt designs in stock , further which would again attract more customers.

iii) BETTER BARGAINING POWER WITH SELLERS

A retailer could get a better bargaining power with their sellers if the inventory moved faster. For example if the other players buy about 10,000 units, subsequently one could buy 20,000 units because of your accelerated sales volume. Obviously, using this bigger purchase order one could ask the seller to reduce the price by another 10% which could give 10% additional profit even with best prices. Whereas in a small store that is only a 10% increase in margin along with a discount for customers.

But when Walmart grew up using the aforesaid principle they became so mighty that they started dominating the sellers. For example, in the present day, if the wholesaler sells 20,000 units to small retailer for $5 with $2 profit, whereas Walmart will place an order for 2 million units and will ask the seller to sell it at $3.5 and because it's such a huge purchase order it gives the seller more profit so they usually agree. Now, when the normal retailer priced their $5 purchase at $7 Walmart puts a price tag of only $4.9.

4. THE REPERCUSSIONS              

The selling price of Walmart is lesser than the cost price of the retailer, hence making it practically impossible for the retailers to compete with Walmart. Subsequently, Walmart walks away with a healthy profit of $1.4/unit and generates millions of dollars in profit without competition. This is the manifestation of the power of discounting.

Initially, Sam Walton could apply discounting to only 20% of the goods because of the franchise restrictions. Admittedly, when he opened his first Walmart store, the aggressive pricing strategy of discounting was a game changer, subsequently this accelerated the growth of Walmart and made them earn millions of dollars in profit.

This is the first reason why Samuel Walton became super successful through the power of discounting.

Now, the obvious question is, Sam Walton wasn't the only one who knew the power of discounting. Moreover, there were other larger players in the market with more financial capital than Sam Walton, then how did Sam Walton specifically succeed? Impeccably, this brings to the second attribute of this legendary businessman and that is market research.

5.     MARKET RESEARCH

Furthermore, it is hard to believe that Sam Walton was so persistent that he literally visited every single retail store in America that he could find. In addition he started taking notes about each and every retailer's activities, whatever they were doing well and what they were not. Consequently, in this process he observed that every successful retailer had a special trait, knowingly or unknowingly that attracted more people to their respective store.

6.         MAJOR OBSERVATIONS

For example, some of them  had an ice-cream candy machine that attracted a lot of kids so when the parents wanted to shop, they specifically chose to go to the store with an ice cream machine so that they could shop without being distracted by their kids.

While, others applied something called the 'Loss Leader Principle' wherein they sold basic commodities like tooth-paste in an ultra-low margin so that they can lure shoppers into making a visit. For example, if the price of toothpaste itself was $1 some stores used to sell it at 50 cents and that would give them two benefits that very few people actually understood.

Firstly, by looking at the low cost of the tooth-paste, customers by default assumed that the store had the best prices for the rest of the products.

Secondly, when the customers are enticed to visit the store, they end up buying other products like cereals, clothes or electronics that were all high margin products.

Definitely, the seller might have lost 50 cents on the paste, but on the rest of the product he used to make a profit of 10-20 dollars. As a result, Sam Walton carefully observed every one of these meticulous elements and  made earnest attempts  to incorporate them in his stores. Moreover, some of the ideas worked out , some ideas did not.  But one thing was certain that if at all there was a retail idea that was floating around in the market, it was impossible that Sam Walton was not aware of it.

7.         ASKING MORE QUESTIONS

It should be noted that Sam Walton managed to seek appointments from the heads of other discount chains, subsequently he introduced himself as a petite retailer by the street. Definitely with a discreet intention to obtain advice from them and on how to carry out business. In contrast, he ended up asking more questions than he was supposed to ask and finally heads of the venture ended up answering more questions than they were supposed to.  Furthermore, with each passing conversation Sam Walton could make a better comprehensive understanding of the prevailing market.

8.         IMPECCABLE MARKET RESEARCH

This impeccable market research by Walmart always kept them in the forefront of the retail revolution. The meticulous details collected through research enabled Walmart to find the best sellers with latest techonogy and the cheapest products. Most importantly every time they set up a store, they knew exactly what products would work, what products wouldn't work and what was the competitor's strength and weakness. 

Now, this begs the question considering the herculean growth of Walmart, subsequently  they were opening hundreds of stores around the year.  Indeed, Sam Walton manage to keep track of the market through three effective principle.

9.   SAM WALTON'S TEAM MANAGEMENT

Safety, Collaboration and Joint Ownership were the three  powerful principles that enabled him to nurture and transform the managers of Walmart into extraordinary leaders. 

SAFETY, COLLABORATION AND JOINT OWNERSHIP

First and foremost principle was Sam Walton ensured that the managers of Walmart owned a percentage of Walmart retail stores. Importantly, this gave them a sense of belonging and inspired them to work with integrity to turn the store into the best one in the vicinity.

Secondly, he  deliberately created a culture wherein the complete team would get together on every Saturday morning to discuss the issues being faced by them and remedial action to be initiated  to be solved in that concerned store. Undoubtedly, Sam Walton ensured that no matter how big or small the problem was, he insisted upon solving the problem together as a team, further without playing the blame game.

Finally, the store managers were given freedom to experiment, in contrast most retailers had strict rules about what a store manager can do and cannot do.

Subsequently, Sam Walton gave his store managers the freedom to experiment with different products and make different marketing strategies so that they could keep evolving with the market better. Most importantly the failure was  not considered for admonition, whereas they were encouraged to do better after introspection. 

Absolutely, he believed that rigid protocol would stifle innovation and in order to keep pace with the fast paced retail industry. It was important  and the need of the hour was to keep everybody  experimenting and acquired a deeper understanding of the market. Consequently, store managers came out with game changing ideas like new store designs and better seller suggestions.

10. CALCULATIVE RISK

Notably, one of the Walmart managers named Phil Green was so passionate and got inspired to experiment that he once bought the largest display of Tide ever and bought 3500 massive boxes of Tide washing powder just to compete with another competitor giant Kmart. Further he brought such a huge quantity  of stock that it occupied an entire section even after being stacked up all the way up to the roof. It should be noted most people would get fired for making such a big risky purchase decision in other entities, but at Walmart one has to not fear. 

Furthermore, Mr Phil Green sold out all of those boxes within a week and suddenly Walmart became the new favorite in town as compared to Kmart. This was a manifestation of revolutionary culture that Sam Walton curated in Walmart, subsequently turning his managers into ambassadors of his business and risk-taking owners. Eventually, turning Walmart into one of the most powerful companies in the United States of America, with  2.2 million employees and a revenue of $559 billion today.

11.         CONCLUSION 

Lesson to be learnt from certain pointers so that one can ponder over in order to cultivate a deeper understanding of Sam Walton.

POINTER'S

Have you ever wondered just like Sam Walton studied retail chains, undoubtedly even Jeff Bezos the Amazon founder  must have done some great market research.

Definitely the question is, What did Jeff Bezos do so well that he was able to compete with a giant like Walmart? When Amazon was a baby, how did Amazon manage to survive in spite of Walmart being so competitive and so aggressive.  

If one wants  to understand the principles of great leadership or to build and operate a great team, I strongly recommend to read an amazing book  'The Culture Code' written by Daniel Coyle, this book unlocks the secrets of highly successful groups and provides tomorrow’s leaders with the tools to build a cohesive and motivated culture. Further, he emphasise on where does great culture come from? How can one build and sustain it in their group or  to strengthen a culture that needs putting in place?

The power of discounting is nothing but psychological inducement to purchase more and be firm to handle discounts.

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