Rafi Mohammed

Guarantee a Profit from Your Loss Leaders: Lessons from Chinatown

Posted on September 16th, 2009 (1 Comments)

Strolling through Boston’s Chinatown the other night, I passed a restaurant offering a “twin lobster deal” for $14.99 (which is about 40% cheaper than the going price). Curious, I went in to learn more – the “catch” is that you have to dine in and order at least 3 other main dishes. A rival restaurant was offering a $2 lobster special for customers who spend $40 or more on other items. These various promotions ensure that profits are earned from a loss leader. Who would have ever thought that lobster – a longstanding luxury food item – would be discounted to sell full priced bowls of pork fried rice?

Jeffrey Trachtenberg wrote an interesting article in yesterday’s Wall Street Journal on Dan Brown’s latest novel, “The Lost Symbol.” Everyone is discounting this bestselling novel. Amazon is selling the book for 46% off and Wal-Mart is offering a 52% discount from the $29.99 list price. Given that the rule of thumb is the wholesale price is 50% off the suggested retail price, retailers are making little to no profit is from these sales (Random House, the publisher, receives its full wholesale price no matter what retailers sell it for).

Booksellers and rival publishers are betting that treating “The Lost Symbol” as a loss leader will spur additional purchases once customers enter the store. This, of course, is the goal of loss leaders. What’s interesting is that some retailers have a higher probability of garnering additional sales than others. If I drive to the outskirts of town to purchase a book at Wal-Mart, I’ll probably pick up something else. Similarly, there’s a good chance that price sensitive customers who purchase from Amazon will buy another product to take advantage of the free shipping for purchases over $25.

However, the odds of customers picking up an additional product are lower at other outlets. Customers stopping at a local Borders bookstore on their lunch break or visiting an independent book seller may just pick up the loss leader and run. One method to eliminate these “cherry picker” purchases is to follow the lead of Boston Chinatown restaurants: “you can get an unbelievable deal on a great product only if you spend $25 on other purchases.” Better yet, these retailers can offer the book at both a normal price (to profit from those not interested in other products), as well as a “super discount” to those willing to comply with restrictions. If I am going to buy additional items at a store, this restriction wouldn’t bother me at all.

The key takeaway is that the chances of selling additional full priced products vary by the type of retailer. Another interesting observation is the type of loss leader product affects the probability of making additional sales. Cheap turkey prices at Thanksgiving “guarantee” more purchases than, say, low priced hot dogs. Thus, additional purchase requirements should be considered based on the type of product used as the loss leader.

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Readers' Comments on This Blog Entry

From Craig Henderson on September 17th, 2009
My mother used to buy whole filet mignon from a butcher shop when I was a teenager. The shop offered the expensive cut at a "loss leader" price - what would be less than $5.00 per pound today. Of course they would weigh the large piece of beef to calculate the price and then ask her if she wanted it trimmed and cut into steaks. Even though the total weight dropped somewhat it was still a fantastic deal. What was really smart on the part of the butcher was the conversation that occurred while they were preparing and wrapping the steaks. "Mrs. Henderson, we just got some really great chicken in this afternoon from a local farmer and some beautiful pork roasts we just trimmed. Would you like us to add a few pounds of one of those items to your order? I've got a couple of great recipes you will love for both of them I through in the bag for you. Your family will be impressed." My mother never left with just the steaks. She became a regular for many years. She would never have known where that butcher shop was, let alone shopped there regularly, if it had not been for the unbelievably effective pricing strategy.