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Loss-Leader: Is it a good idea or not? by Doc Pratt The answer to that question is it can be great for business or a total disaster. The loss leader is a pricing strategy which involves selling products and/or services at a price that will generate little or no profit and in some cases not even cover all costs associated with it (marketing, overheads, direct costs, etc). This may sound crazy but it is a technique that is commonly used to attract customers to their business via a bargain. These bargains will attract customers to your business that may then purchase other products and/or services even if they don't buy the product that you have initially offered. As these customers become repeat customers and start referring their family and friends then the initial “loss” is quickly offset by the increased revenue.
One note about this technique is that it must be a legitimate offer someone can take advantage of. Car manufacturers for years have had the “loss-leader”, the car that has no options and barely has an engine in it. In the 2004 model year Jaguar advertised a $299 per month lease on an X-class Jaguar. It turned out to be a specially built car that most dealers didn’t even have, plus it was a low mileage lease with thousands of dollars down. Make sure it is a legitimate deal.
Here is an example of a totally legitimate offer that totally backfired. We have two video stores close to our house. They are national chains and directly across the street from each other. My wife prefers one store over the other, and the “other” store sent her a two-for-one coupon. In essence the coupons said that the store would pay 50% of the rental fee for two videos. Many retail establishments use various offers to get potential customers to come to their store. The offer, which is the Loss-Leader, is designed to get the potential customer to walk through the front door. Certain tactics should be used, based on the overall strategy of the business to achieve various outcomes with the customer once they are there. There can be any number of desired outcomes, but ultimately, the main one is to make sure that person has a reason to return to the store again. If the store had no set strategy concerning how employees should handle existing and potential customers, then it is at the mercy of those employees and their own personal agenda. So now, back to the video store, the coupon was successful by getting my wife to walk through the door. After she enters the store, it is the employee’s turn to execute the tactics consistent with the stores strategy, which means at least being nice, courteous and helpful. Well they weren’t nice, courteous or helpful and when she left, with her two videos, she said she would never go back again. Not only did the store pay 50% of her rental fee but they have lost all future rentals she may have made at the store. Plus, as an unhappy and dissatisfied customer, she will most likely be sharing her negative experience with all her friends. The video store would have been better off not mailing out the coupons until their core customer service issues were fixed first. If you are going to use a Loss-Leader to get new customers, remember that it is designed to get people to walk through your door. Make sure that the employees who will work with that person are aware of their value as a customer and will do everything in their power to ensure that they have a pleasant experience and will want to comeback. The Loss-Leader method can be either a great investment, or an incredible waste of time and money. Either way its effectiveness is controlled by the employees who come in contact with the customer wanting to take advantage of the deal, or in this case, the rental coupon.
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