Marketing Basics – What is a Loss Leader

This article was prompted by an item in Stuffs Prosper section ‘There’s often a simple, creative solution to your sales problem.’ In this they cite an example of a coffee shop near a popular surf beach that boosted their coffee and food sales by selling surfboard wax at cost. This is an example of Loss Leader marketing and we are going to look at it in detail in this article. We will discuss the concept, how it can be used by any business, and is it suitable for your business.

What is a Loss Leader?

In the simplest terms possible, a Loss Leader is a product or service that is sold at below the normal mark up (often at cost) as an incentive for customers to purchase from the business. It’s assumed that because the customer has come into the business to buy that item, they will pick up other products along with it, helping to recoup the lost revenue of the loss leader item.

The classic example of how to do this I often see recommended is choosing your top selling item, making that your loss leader, heavily promote it, and watch the resulting sales to make sure it’s boosting overall revenue to compensate for the loss of the lead item. I disagree with this logic because it runs the risk of not only cutting out vital revenue, but depending on the nature of the business and the item introducing a price war with competitors. You can also see from the coffee shop example, you don’t have to do that to make loss leader marketing work for a business.

Does it have to be a product or service you sell?

No. As you can see the coffee shop example they were selling a product that was found in surf shops not coffee shops. It was an essential item for surfers so knowing where to get it a good price is worth that first visit. What kept them coming back was the environment of the cafe which encouraged them to hang out, making it a popular social spot. Where people socialise they spend money on food and drink, which is his business.

The key thing is it has to be a staple commodity or service of the market you want to target. Something that always sells and you know people will make a trip especially for it if the price is right. Another example I like to use is that Copy Express’s local Pak ‘n‘ Save supermarket, does a discount price on two of 2 litre own brand milks. As the price margin would be tight, especially on the 2 litre size, it still makes sense for them to do it. The savings on such a staple is enough to bring customers into the store for just that, and while they are there they pick up a few other items they need. (They also wisely limit the total amount per customer so they don’t get bought out by ‘trade’ and lose out on the associated sales from general customers.)

For those who are not commodity related businesses, there are still opportunities to use this technique. For the trades, the classic ‘first hour labour is free’ or a free onsite consultation come to mind. For a personal services industry you use add ons to recover revenue; for example a hairdresser would have low cost haircuts, but the optional shampoo and blow wave are priced to help restore the lost revenue. White collar professionals would offer a discount on the first consultation, providing a set of materials, access to an online training course for free, to name a few examples.

No matter what the business you are in, there is a way of providing a loss leader item if you want to use this method of marketing.

What would you choose for a loss leader

As both examples listed in the previous section show, the key is an item that is a staple commodity for the market you are targeting. This commodity doesn’t have to be part of the products/services that the business is built around, but it is something that is of need to a given market. They are also low ticket value items, that is something that doesn’t come with a high cost to the business to bring it in. They must also have a consumable nature so there are repeat sales to the same people over a given period.

Let’s look at the example of that coffee shop’s surf wax. The coffee shop sells coffee, not surf supplies. They were located close to a popular surf beach, so it made sense to carry an item that is used by a large number of people in the area they serve. The wax is the logical choice as a loss leader. The cost is comparable to a cup of decent coffee so it’s low price. It’s a staple commodity as surfers have to wax their boards every surf session. It is a consumable, the surfers use up the wax so have to keep buying more to keep surfing. Assuming that he sold the wax at a price that just covered cost and sales taxes, then every cup of coffee brought along with the wax was revenue he wouldn’t have made otherwise.

What if you are more of a service or ‘professional’ business? This is where things get more interesting. While you don’t have a commodity to use as a loss leader, you do have your time which can be the enticement. I have talked about businesses using online offering as blogs, videos, downloadable pdfs, etc, as a form of marketing. This is a form of loss leader as there is a cost of creating this material, but making it freely available means you’re encouraging potential customers to visit your website. Once you have them there it’s much easier to make your marketing pitch to them. This blog you are reading right now is such a ‘loss leader’ as it takes my time to create it but I’m giving it away for free. To see it, you have to visit our website, an online printing system, so while someone is there looking at the articles they will naturally end up looking at the services we offer.

Are there downsides to loss leaders?

There can be, if you don’t pick the right products.

Firstly there is the risk of a price war with other businesses if you appear to be ‘muscling into their turf.’ In the coffee shop example, they only sold surf wax and nothing else, a low price commodity. For surf shops that is an add on sale product, something that people pick up while in the store buying other things. They might have customers who go to the store to buy it, but unless it’s a shop brand, most customers would buy it from the most convenient one. Which in this case helps the coffee shop because they were convenient to that surf beach and closer than any of the surf shops. Pak ’n’ Save’s milk loss leader is their own brand, so there’s no competition for it even though it’s a high volume commodity. If they had offered a loss leader on Anchor milk, then the other supermarkets would have to price match, removing the advantage of offering the loss leader in the first place.

Secondly you might end up being known for the loss leader and not for what your business is about. A petrol station offering the cheapest bread in town doesn’t make sense, as they would end up devoting space and resources to a product that’s not it’s core business and not making the revenue to keep it running. If it had been oil and radiator fluid, then that’s related products and if people are getting those then they are more likely to fill their tank at the same time. Again in the case of the coffee shop, while the surfboard wax brought the surfers in, they kept coming back because it became a place to hang out, and they brought food and drinks while there.

Finally for some businesses it might cast the wrong impression offering a discounted item to get people in. No one goes to a funeral home that offers the ‘cheapest embalming in town.’ It’s all about knowing what is acceptable for the market you want to target. For our coffee shop, it’s clear they are a seller of food and drink and provide a location for people to meet up. The wax is just something they carried as a convenience for their customers, even though it was the tool to bring the first ones in to ‘discover’ the business.

Is using a loss leader right for your business?

While I have shown that any business can have loss leaders items as part of their marketing strategy, it’s important to decide if it’s the right fit for your business. There are no simple answers to this question but I can offer a nice bullet point list of questions to ask when deciding if offering a loss leader is right for your business.

• Who is the market I want to target
• What are low cost items or services do they purchase on a regular basis
• Which items are universal for the market, and are not core products of other businesses.
• Will I be directly competing with other businesses, especially ones within a short travel distance of my own, by offering this item/service.
• How much of my resources will I have to spend in providing this item/service take, and will it affect my core business.
• Does the item/service relate to my business in an obvious way. If not, does it conflict with my business.
• Does it fit with the image I want to present of my business.
• Will it encourage customers to buy other items/services at the same time.

And that’s the basics of what loss leaders are, how they work, what you can use as a loss leader, and how to decide if it’s a useful marketing tool for your business. Want to learn more about other marketing solutions, get design advice, learn how to make your business life easier, then why not have a read of the other articles here on our Copy Express Blog.