Business owners will try almost anything to attract customers and entice them to spend. Promotional strategies run the gamut, from the tried-and-true to the slightly risky to the wild and offbeat. From contests to social media-based promotions, cause and charity associations to customer appreciation events, every strategy has its own pros and cons.
But here’s the big question: Would you deliberately lose money to increase your chances of making more of it? Don’t worry—we’re not talking about gambling away your business. Some promotional strategies can be risky if you don’t know how to go about it. But experts say there are ways to increase your chances of getting it right and ensuring success.
We’re talking about the loss leader strategy, whereby a business offers a product at a loss (or at least a deep discount) to draw customers to your store (or website if you’re e-commerce based) in the hope that once there, they’ll decide to buy other, higher-margin products.
So, what makes a loss leader strategy successful?
- Good quality and desirable merchandise
- Pricing so terrific that customers think they’ll never it again
- Heavy promotion
- Good timing—weekends are excellent times for loss leader promotions
- Tracking and measuring that provides a clear picture of what your loss leader accomplished
We see loss leaders everywhere, across business sectors. It’s a widely used strategy, and when it works, it can pay for itself many times over, attracting new customers and deepening your relationship with existing ones. But, cautions smallbusiness.chron.com, the biggest disadvantage is that it can backfire. For example, Amazon hit the loss leader jackpot a couple of years ago by offering a new Lady Gaga album for $0.99—a $3 million loss that attracted thousands of new customers to the site, which then crashed. The company was able to re-launch and, despite the additional losses, still pulled off a successful promotion. Although good for Amazon, it’s unlikely small businesses could withstand that kind of loss.
That’s why Steve Strauss’s commentary in USA Today warns business owners to use caution with the loss leader strategy. If done incorrectly, he says, you can lose big. Strauss urges business owners considering a loss leader to take two initial precautions:
- Be sure that the lost profit can be offset by the sales of other goods or services.
- Be sure you actually have the discounted item at the advertised price. You don’t want to be accused of ‘bait and switch’ or any other kind of fraud, which is illegal.
So, Strauss says, as long as you don’t price the item too low and take too big of a hit in the process, using a loss leader can be a very smart way to go. It can build your sales, your customer base and even your reputation.
Interestingly, a loss leader can accomplish a variety of things:
- It can help get rid of unwanted merchandise—maybe stock that isn’t moving or that you don’t want for some other reason.
- It can attract new customers who might not have even been aware of your business until your loss leader promotion got their attention.
- It can help build your brand—if offering loss leader fits into your brand values and attributes.
- It can bring in repeat customers. Everyone likes a good value—good quality paired with a good price.
By now you’re probably thinking about loss leader ideas for your own business. To help you plan, marketing guru Hollis Chapman offers some insights for putting together a successful loss leader promotion. For this strategy to be successful, it must include the following:
- Universal appeal
- Low price/fee
- Plenty of space
- Prominent, well-place promotional messages in multiple locations
- Some built-in fun
Chapman says loss leaders should not only deliver immediate revenue to your bottom line but should also be an effective tool for building a mail (or email) list to use in your CRM (customer relationship management) efforts. In fact, he says offering a loss leader class is a great way to do this.
Have you tried a loss leader promotional strategy? What did you find worked well—and not so well?
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