How Small Retailers Can Take Advantage Of Loss Leader Promotions
A loss leader is a product a retailer offers at an extreme discount in the hopes of getting shoppers through the door, where they’ll ideally buy other regularly priced products. A loss leader is generally priced beneath its normal profit margin, but not necessarily below cost. Typical loss leaders are products that are sold frequently, that customers are very familiar. So the shopper knows right away that he or she is getting a great deal.
Loss leaders can be used strategically to establish a retailer’s reputation of offering overall good prices, and when executed correctly, can result in a massive long-term payoff. But making loss leaders work requires planning. In this post we’ll explore a few of the dimensions that you need to understand before moving forward with this strategy.
Loss leaders have traditionally only been used by bigger retailers who want to squeeze out the competition, but the fact is, with a few smart strategic plays, even small retailers can derive huge benefits from the loss leader strategy. This post will show you how.
Defining The Objectives
Perhaps the most important factor in the success of a loss leader promotion is identifying your target audience. Ideally, the loss leader is targeted at customers who have a long lifetime value and are likely to return. This means choosing the right products to offer as loss leaders, and clarifying your goals up front by asking the following questions:
• Do we want to attract new customers who will love our store and come back? This approach requires that you select loss leader products with mass appeal that will bring in a variety of shoppers.
• Do we want to bring back customers who have drifted away? To bring back shoppers who have lost enthusiasm, you can offer a product that is unique to your business at a bargain price. This is great for rekindling interest.
• Do we want to generate specific future sales? If you have a product that tends to be the centrepiece of a range of products, you can use the centre product as a loss leader. Before holidays, for example, grocers heavily discount main dishes like hams, knowing that people will also buy side dishes, vegetables, desserts, and drinks at the same time.
Determining loss leader price is also important. Knowing your break-even cost, you’ll need to know what competitors charge. Then you have to determine whether you want to offer the product at cost, for a very thin margin, or at a loss. For example, if you have a large quantity of items you need to move quickly, you can sell them below cost to clear them out and drum up cash flow. If your goal is to lure shoppers from competitors, pricing products slightly above cost, but below competitors’ prices is ideal.
Risks With Loss Leaders
Using a loss leader strategy is not without risks. For example, there are shoppers who specifically go from one store to another only to buy loss leaders, and they make it harder to profit on sales of regularly priced merchandise. And some manufacturers balk at retailers selling their products at steep discounts. Another risk is consumers who stockpile loss leader merchandise. Retailers avoid this by limiting the amount each person can purchase and making it clear that loss leader prices are good only while supplies last.
Loss leaders don’t always produce quick results, so it’s a strategy that needs to be well thought-out and fine-tuned over time. A secondary goal for loss leaders in addition to getting people to spend more on regularly priced merchandise is ensuring that your store’s name is the one that comes to mind when people need to shop, and this is a long term rather than short term goal.
Loss Leaders and Loyalty Programs
The impact of loss leaders is tremendously magnified by a loyalty program, because while loss leaders get shoppers through the doors, loyalty programs keep them coming back. Loss leaders can even be used as incentive to sign up for the loyalty program. For maximum success, both loss leader promos and loyalty programs require that you identify your best shoppers and target loss leaders and loyalty rewards toward them. Loyalty programs provide retailers with valuable information about shoppers and their habits, and this data can be used to correctly target loyalty rewards and to determine which products make the best loss leaders. When you know more about your customers, you can focus marketing efforts on the most profitable customers and the best products.
When you use loss leaders in conjunction with the valuable data you amass from customer loyalty programs, you can provide the right incentives, enjoy high response rates, and help your business thrive over the long term. The Loyalty Box is a leader in easy-to-implement, affordable loyalty programs that are compatible with all major point of sale systems. You can sign up for a no risk free trial with The Loyalty Box and discover for yourself how beneficial your own customer loyalty program can be.