Building a customer base and securing future recurring revenue demand effective strategy to lure and sustain target.
A business often begins by spreading words about its offerings. Next it works to stimulate trial – those buy 1-get-2, or 30%-off-price tactics. After giving the business a try, it’s up to the customers to decide to switch or stay with that business.
But a business must try its best, in the first place, to convince these target customers to try out its products and services.
‘Loss leader’ is one of the most effective sales promotion strategies. It involves structuring prices to stimulate customer patronage. Since marketing guru, Peter Drucker, emphasizes that one of the main business of a business is ‘to create customers’, hardly can any firm, whether it is a superstore, a manufacturing company or serving agency, survive without placing strong emphasis on this aspect of marketing.
Think of several promotions announcing ‘black Friday sales, 50% off all mobile phones’, or ‘Volkswagen Coupe for the price of a horse’ (this one is funny though). These are attempts by marketers or businesses to draw buyers into the store or showroom, sell them basic products at cost or at a little loss for a chance to get the buyers to explore the store further, and eventually buy other items at regular, profitable prices. That, of course, is how the business mops it losses and gain a customer.
This is how it works. Automobile dealers are known to announce a strip down version of a popular car model to attract buyers. These dealers would then devote a larger part of the showroom to showing the buyers better versions of the model at full price. Imagine the latter with factory fitted AC and cameras and the former without this luxury.
Supermarkets sell staples such as milk, eggs, bananas and other inexpensive items that are hardly purchased alone at a price less than the cost to draw customers to their business. These customers will go ahead buy staples at good prices.
Telecommunications firms recently make voice calls extremely cheap to get more subscribers while selling data at normal rate. Gillette and Bic sell their razor unit at cost but make their money on replacement blades. The same obtains with cable TV service providers. These firms sell decoders at a loss but make money on the monthly subscription.
Netflix, the US streaming giant can give potential subscribers up to 1 month free streaming for the opportunity to enlist them for a full year subscription. This captive pricing strategy is supported by the association rule analysis which assumes that whatever lead people to buy the low cost product will also attract them to the normal priced products.
Simply put, the concept of ‘loss leader’ describes how an item is offered for sale at a reduced price with the intention that the purchase of this item will lead to the purchase of other items at normal mark up, leading to profit and increased customer base for the business. However, the item offered as ‘loss leader’ does not necessarily have to be below cost. It can be offered at a price that is below its minimum profit margin.
Though consumers may want to take advantage of price promotion to stockpile, businesses using the ‘loss leader’ strategy must ensure minimal level of the items are offered for purchase. This will alter any adverse effect on long term business profitability.
These are what to take note of when offering items as loss leaders:
- Items offered as ‘loss leader’ must be items that consumers purchase regularly. This makes the low price a bargain.
- ‘Loss leader’ must not be offered in high quantity to discourage people from storing for a long time. This way they will be compelled to visit the store frequently
- ‘Loss leader’ must not be placed at convenient part of the store where buyers can quickly hop in and get out without seeing other products they may also need to buy. Customers must be made to walk through the store, pass other items offered at normal margin.