At RepricerExpress, we’ve written plenty of times about the dangers of downwards-spiking prices as being a race to the bottom. But in this post, we’re going to examine it from a different angle: using loss leaders to get ahead.
The Difference Between Loss Leaders and Races to the Bottom
It can be a little confusing to keep the specifics straight between the two, so here’s a mini refresher if you’re at all unsure as to what differentiates each (and how to use them):
- Race to the bottom: This happens when you price your items solely to beat your competitors. Most, if not all, successful online business employ repricing software, which automatically scans prices of identical products and then lowers their own to be the cheaper option. Over time, competitors’ repricing software systems will keep lowering prices until profit margins are below razor-thin, making it just plain bad all around.
- Loss leaders: On a regular basis, rotating products in a store’s inventory will be priced much lower than for a regular sale. The primary purpose of this is to entice buyers to stay within the store and pick up everything else they need. Most shoppers value convenience above all else, and will generally spend the same — or a bit more — on their other purchases if something big and shiny is priced cheaply.
The Other Reasons Behind Loss Leaders
Sometimes, merchants toss out loss leaders for more nefarious reasons, such as hooking buyers in for a long-time commitment they may not have been anticipating. We see this in cell phone plans, printers and ink cartridges, and just about anything that can’t simply be bought and maintained by the average person.
Other times, what may look like a loss leader just maybe the merchant getting rid of old or slow-moving stock, although it’s hard to tell on the other end. All the consumer sees is an almost ridiculously-low price, and they’re drawn in faster than a salmon to an upstream current during spawning season.
Making the Best Decision For Yourself
A loss leader can be a fantastic entry point into bigger profit margins down the road, but you have to make sure you’re using this tactic for the right reasons. If you’re just loss leadering products all willy-nilly, not much good will come of such a haphazard business plan (or lack thereof). Instead, you should be using one of the following four reasons in making a product a loss leader:
- Moving Old Stock: If you’ve got a pile of Beanie Babies you just can’t move, then considering pricing them as loss leaders so they stop taking up valuable real estate. Just make sure your copy backs up the price discount if you’ve got an item that may be considered retro (aka out-of-date).
- Higher Future Sales: One of the biggest selling features of loss leaders is their ability to keep customers in the store so they spend more money on other products.
- New Customers: This is an especially good tactic for business owners who are just starting out, as loss leaders are a fantastic way of spreading the word about your business. A couple months ago, a Chinese restaurant opened up a few blocks away from me, and advertised 20% off for the first week. And every single time I walked by, all their tables had diners sitting at them.
- Old Customers: Let’s say you have an existing customer base that hasn’t been shopping with regularity lately. Loss leaders, as you may have guessed by now, can be a way to lure them back by showing them you’ve got their best interests at heart.
Just Remember…
When you set an item as a loss leader, you still have to make a profit on it so don’t set the price too low. We don’t necessarily mean that you have to make a profit on this profit, but that your business should be pulling one in at the end of the day. One of the best ways we’ve seen of doing this is to look at what prices your competitors are charging, what the at-cost price is, and settle on something in the middle.
Final Thoughts
Even if you plan on putting out more than one loss leader, you still have the rest of your items to contend with. Loss leaders can be easy to reprice, but managing a full inventory isn’t so turn to RepricerExpress for help. And when you do this, there’s no match or heavy lifting involved, just signing up for your 15-day free trial.
