Out of the Crisis.Org

[Bud]

Every time I've bought ad space the
salespeople said "Run a special, a loss leader. Advertise
something cheap, just to get people into your store, then
they will automatically buy other things." Usually they add
"Everybody else in business does it, you should too."

Listening to the way people discuss advertising,
that does seem to be a common belief
and widespread practice. But another common statement I
hear is that "advertising didn't work" for many businesses.
They lost money on their ads, especially on their loss
leaders.

That is because pricing is not simple aspect of business,
but a complex subject.

There are many scenarios in which loss leaders yield, well,
net losses. Conversely, only a few narrow conditions
warrant the use of loss leader specials, and allow them to
be successful. Here are the four most important conditions
for loss leaders to work.

1) In order for something to be a leader it must have, well,
followers; or you could say, immediate add-on sales.
2) The item sold at a loss must be something that people buy on a
regular basis, preferably on a frequent basis.
3) It also must be a 'low-involvement' purchase.
4) Finally, it should, and almost has to be, a low-priced item.

Here are three examples of common, successful loss leaders:
A drug store chain advertises tissue paper or toothpaste at
extremely low prices, with quantities limited, of course,
for a limited time only. They promote their special with
coupons by mail. A convenience store advertises a soft
drink (soda, if you live up North) at a very low price.
They advertise by installing a temporary sign in front of
their store. Lastly, a grocery store runs a special on
(pick your favorite commodity product) by newspaper
inserts, say in the Thursday paper where all the other food
store flyers are.

All those examples are meant to increase floor traffic, to
bring in people who would not normally be customers, at
least not at that time. Obviously the promotions would be
failures if people did not scoop up other things to buy
while they were in the store; impulse items. Or maybe the
shoppers don't want to feel like they wasted a trip to buy
only one item, so they 'round out' their purchase with
other things to make them feel productive. [Don't you wish
the car repair business was like that?] And soft drinks
(sodas) go well with snacks, especially if your friends or
spouse don't see you with that stuff. Either way, those are
the 'followers' that make selling one item at a loss
worthwhile, and produce a net gain for the store on the
entire, one-time purchase.

Therefore a loss leader is different pricing tactic from
offering a cheap option for one market segment, a higher
priced one for the next, and so on. That is simple
segmentation.

But car repairs don't fit the model, so far, for loss
leader pricing very well. A possible exception might exist
for drive-through oil changes. Maybe. Those might produce
add on sales immediately, and oil changes are regular,
although not frequent, purchases. So quick, simple oil
changes might fulfil the second condition for a loss leader
price special, frequency of purchase.

But car maintenance, and especially car repair, is not a
low-involvement purchase, the third condition for a loss
leader to work. Simply, if people are not happy with their
tissue paper, toothpaste or soft drinks (I know, sodas for
our friends up North) they won't buy those brands again.
Simple. There is no long term involvement with those
products. More importantly, there is no long term shopping,
and comparing, prior to the purchase.

But if people are not happy with their car repair purchase,
their whole life can be upset till it is made right. If not
made right, they might never forget it, and harbor ill
feelings forever.

The same trauma happens when other high-involvement
purchases go bad. Think of poor buying decisions on major
items, like a home with hidden faults or a car that is a
lemon. Therefore, for our discussion of loss leaders, we
are using the measure of shopping time and potential for
trauma, or a big upset, as the measure of 'involvement'
with the purchase.

Finally, that potential for a major disappointment means
that loss leaders almost have to be done with cheap,
inexpensive items. It takes something low-priced to induce
a trial purchase or a trip to a store. But since a personal
vehicle is the second most expensive asset most people buy,
next to their home, they won't respond well to messages
that say 'cheap, expendable.'

To get a bigger view of these four conditions, here are two
examples of sophisticated companies that failed with their
loss leader specials:

Gold-Toe socks tried it with men's socks, which are usually
small-ticket purchases, and failed. They discovered that
men only buy socks once a year, and a low price did not
induce them to buy more often. They, or we, simply don't
need tons of socks. We buy socks when they wear out, not
sooner, even if we see a low price special. So the loss
leader special did not increase demand for quantity. Their
solution for Gold-Toe socks? Promote, not discount.

Play-Doh sales were steadily dropping. They, however, knew
that women only bought Play-Doh one time yearly on average,
and that nothing would ever change that. Their solution?
Increase the package size by 50%. They did, and sales went
up....50%, by dollar measurement, not by quantity.

Remember, pricing is only one part of a company's marketing
mix, the unique set of features with which they face their
market. Unfortunately, pricing is the one feature that
every potential customer can understand and base a buying
(or no-buy) decision on.

In conclusion, conditions have to be just right for loss
leader price specials to 1) increase customer traffic, and
2) to insure those customers will buy additional items to
make the promotion profitable. That is because pricing is a
complex subject. And it has been said that for every complex
problem there is a simple solution; and it is wrong.