Why Amazon, Nordstrom, and the Gap Are Jumping on the Flash Sale Bandwagon

By Alexandra Huttner Aug 04, 2011 2:30 pm

The enormous profits made by flash sales are a sign that retailers have learned to harness the power of biology.

In the past few years, fashion flash sales sites have been popping up left and right. Websites like Ruelala and Ideeli have become household names, not to mention Gilt Group, the luxury-brand site that launched in 2007 as the undisputed forerunner to this movement. The company perfected the formula behind these deep discount sites: provide members with a limited number of luxury clothing items for a short window of time -- usually 24 to 48 hours.

The recipe has proven so successful that even the titans of retail like Amazon (AMZN) and Nordstrom (JWN) are now cashing in on the trend. Amazon just joined the fray by starting its own flash sale site called myhabit.com, which functions the same way as Gilt. (A mobile app was recently added to the format, making it possible for shoppers to snag a deal from their iPhone on the go.) Nordstrom this year acquired the flash-sale site Hautelook.com for $180 million in stock. Banana Republic (GPS) is teaming up with Gilt to offer flash sales for its forthcoming "Mad" clothing line. Meanwhile the flash sale concept is now being employed to sell vacations, interior design, food and wine. Even Groupon, the online deal site, essentially follows the same "get it while you can" business model motif.

So, the question remains, how have flash sales companies managed to rake in any revenue, let alone the hundreds of millions they have recently reported? The answer can be explained by human nature.

The Science Behind a “Buy Now or Never” Ultimatum
The creators of flash sales sites know how people work and use this knowledge to attract consumers. Scientifically speaking, there are sound reasons why we, as humans, are so attracted to the sale, and even more so, “the flash-sale”.

On the website, Psychologytoday.com, Kit Yarrow, PhD, explains this psychological phenomenon. In “Flash Sales: The New (Deeply Psychological) Budget Busters,” she names several facets of flash sales sites that make them so addicting and appealing to their users. In one instance, she relates the story of a consumer who would became fixated on a bargain after visiting a flash site. Yarrow explains how this behavior is the general tendency amongst shoppers on these sites, who “over focus on the hunt and bargain, and under-focus on their need for the product”.

When the typically strict time requirements are added to this mix, the "leisurely browsing" aspect of shopping is eliminated. The flash sale experience challenges the brain. It becomes a “constant requirement to mentally evaluate whether or not to buy” -- something that is not so easy for many individuals, especially when the price tag has a colossal "60% discount" right next to it.

As human beings, we all yearn to belong. From a basic evolutionary standpoint belonging has meant survival in many, if not all, societies. So, from the beginning of the human race, our minds were embedded with this concept and gave us the inherent need to seek and attain approval. Abraham Maslow’s hierarchy of needs states that all humans have five basic emotional needs -- one of these is “belongingness.”

Flash sales sites use humans’ inherent need to belong by promoting their site as a “group” with required membership. They play up the exclusivity of this membership, which makes signing up that much more enticing. Almost like receiving an invitation to join a secret society.

Examining these sites through a psychological lens, we're exposed to their inner workings and what it is that makes them so successful. The feeling of belonging, the exclusivity, the mystery all lure us in. The excitement, the competition, and the exhilaration are what keep members hanging around, wanting more. The companies also rely on this bodily response: the sense of excitement each sale produces affects our autonomic nervous system which clouds our thinking, according to Yarrow, thus resulting in many purchases that might not have been made had we been thinking clearly. From her website:

Competitive sport shopping can cause injuries — to your budget. Short-term sales and limited quantities can trip-up even the most disciplined shoppers. Decisions are clouded by autonomic nervous system arousal that's fired up by
competition. The solution? Put it in your cart but wait 20 minutes to buy — it takes that long to clear your brain.

Even though we may recognize the psychological tactics of these sites, many believe the consumers’ addiction to the excitement is too strong to be broken. On top of that, many consumers are addicted to something else that parallels the foundation of these sites: saving money.