Rafi Mohammed

The New “It” Holiday Season Pricing Strategy: Loss Leaders With a Twist

Posted on October 13th, 2009 (0 Comments)

Last week I was interviewed on CNBC about Wal-Mart’s announcement that it is selling 100 brand name toys (Transformers, Barbie, Hot Wheels, Lego, Tonka, and so on) for $10. The cable business news network was interested in the implications of this pricing strategy on retailers.

Wanting to say something more insightful than “it’s a loss leader,” I did further research and found a fascinating new trend. What’s interesting is that this year retailers are using premium brand name products as a loss leader in hopes that customers will stick around to purchase staples. Examples of this trend include Wal-Mart (brand name toys), book sellers (Dan Brown’s “The Lost Symbol”), and high-end restaurants (the Capital Grille is advertising “extraordinary wines at an extraordinary price” for holiday parties booked before October 31). Remember the old days when these premium products were big profit centers? What’s going on here?

The reasoning behind this new loss leader trend is straightforward: in good times customers are willing to pay a premium for branded top-of-the-line products…and in bad times they aren’t. Staples-like products are traditionally used as loss leaders to get customers in the door (like cheap buffets in Las Vegas do) - and hopefully customers stick around to check out and purchase the latest full price “wow” products. This year though, with the economy in the early stages of recovery, consumers aren’t willing to pay full price for premium products. This will be a holiday season of sweaters and other basics.

With this consumer focus on staples products, retailers are looking for innovative ways to draw consumers into their stores. A “panic button” 50% off sale on staple products is a surefire way to attract customers. But, of course, thin margins on the primary products that are in customers’ shopping carts yield low profits. What we are observing is a graceful attempt to lure in customers: “wow” customers by discounting premium goods that they otherwise would not purchase and then get them to pay full price on basic products while they are in the store.

Will this pricing détente on staple products last? It is too early to tell – we are in the first inning of a nine inning holiday season. If the economy keeps improving, we may see retailers refrain from invoking mutually self destructive price wars.

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