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Why REI has smart cookies working for them

When I was an anthro student there floated around a list of jokes such as “you know you’re an anthropologist when you see someone with a limp and the first thing you think is how you’d like to see the wear patterns on their tarsals.” It’s funny if you’re an anthropologist, believe me.

So, now that I’m a business student, I see the world in terms of business models. I can’t walk into a fast food restaurant without thinking about logistics and production design, or see an advertisement without thinking about branding strategies. Today I went to the REI members-only garage sale, and here is why I think REI Corporate knows what it is doing…

At 6:58 am yesterday I arrived at the REI Santa Monica because I heard from a friend that their members-only ‘garage sales’ were not to be missed (Thanks CM!). I went at 7am not because I’m an REI freak who needed to be there the second they opened, but because I had class from 9-4:30, so that was the only time I could make it. Well, apparently, there ARE a lot of REI freaks around, as I was about the 60th person in line (with about another 100 behind me by 7:30) and getting there early is the only way to go — some people were there at 5 am…

What I didn’t know was the way it works which is this (their website could be better about explaining)… They have a small section of the store roped off with LOTS of stuff piled about, without much organization (bags, gear, clothes, shoes in general groups, but no organization like by size, etc) and the staff offer no customer service other than to process orders and kick you out once your time is up. They let in 25 people at a time and you have 15 minutes to grab, stash, and then get in line to buy. No returns allowed.

If you want pants, you either guess it will fit, or drop trou in the middle of the store, as did some less-cellulite-ridden people than I. I took a gamble on a pair of REI convertible pants for $13 which fit like a charm when I got home (regularly $55) and a $9 a Sierra Design raincoat (regularly $54). By the time I had grabbed a bunch of clothes my group was herded to the checkout line, where people then have time to decide what they really don’t want to buy, and lurk out of line to put those items back while the next group is shopping. Most of the decision-making seems to happen in line, so far as I could tell — the 15 minutes is just “might I be interested, yes? Grab it.”

Observing REI, here’s where they get snaps: When a company has a return policy that allows people to return almost anything for any reason that means they end up with a lot of waste product that is sold at ever-deepening discounts, if sold at all. If the product is actually damaged, in most other places it is scrapped. But, by selling all their damaged or outdated goods in an off-hours event they achieve the following:

1) They get money for something they otherwise would have written off and thus are better able to afford the return policy.

2) They have no other fixed costs to make this happen, since they’re using the existing store facilities, they just need to pay for extra labor.

3) Events like this available only to members, plus the generous return policy only to members creates brand loyalty and increases switching costs (you’ve paid a membership fee which makes it seem ‘wasteful’ to go elsewhere, plus you get “dividends” some tiny percentage back on what you spend per year – to be used in the store, of course).

4) They let you buy online and offer free shipping if you have it delivered to a store (which sucks if you don’t live near one, but cool if you do), and you can buy from their “outlet” site and regular site in the same shopping cart.

5) If someone likes something they bought at discount, they might be inclined to buy another at a higher price.

I wonder if there is an HBS case on REI out there already?

Next sale in Santa Monica is April 29. Maybe I’ll be there at 6:30, but I’ll be damned if I’m getting there at 5am!

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2 responses to “Why REI has smart cookies working for them”

  1. Josh says:

    I actually work for REI and while it is a great company to work for the above comment has a few errors I would like to point out.

    First of all you only get 15 minutes to shop the used gear sales for the first few hours of the sale. After that you can spend as much time as you like looking around and can try on anything in a real dressing room.

    Secondly the return policy is the same for members and non-members. It’s just that a non-member would have to bring back there recite whereas a member does not need the receipt because we keep track of members purchase history and can look up an transaction.

    Lastly the member dividend is 10 percent not some tiny amount and you can turn in your dividend for cash between July 1st and December 31st of any year.

  2. marty says:

    While Josh’s details are correct in his reply, so is the article itself. Perhaps the article did not elaborate entirely, but nonetheless, it told you the basic info to understand what REI is about. Oh and Josh, just so you know, 10 percent IS a tiny amount.

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