Forget Loss Leaders; Profit is Non-Negotiable
The idea behind a loss-leader is that you sell something super cheap; in fact it’s such a deal that you lose money on every unit you sell. The idea behind this is to get customers in the door and it’s the other items they buy while they’re there that make you money.
And of course, customers love the idea of flaunting the deal they got at an obvious loss leader price. Loss leaders used to be quite popular. And promoting something like it is one is still really popular. But usually they’re not loss leaders at all …
The Business Landscape Has Changed
The first thing that most businesses have come to understand is that selling loss leaders doesn’t necessarily mean you’ll get any other business from a customer. This is especially true in business-to-business deals. And bringing on a loss leader doesn’t mean you’ll keep a contract you already have or that you won’t get the deal in the first place if you don’t take the hit.
This is partly why most successful businesses don’t sell loss leaders any more. There’s just no money in it.
But what’s really changed is the amount of sheer competition in the marketplace. Most companies can’t afford to take a hit with a loss leader. And the fact is, if you want to sell blue widgets at a better price than the next guy, guaranteed there’s a company out there who can supply you with “off-blue” widgets at a door-crasher price. So there’s no need to sell them at a loss.
To survive in such a competitive environment, you’ve got some choices to make. And here they are:
- You stay in the premium “pure blue” widgets market. Build your brand; offer your best price and that’s final.
- You start grinding your suppliers for a better price or find more cost effective suppliers.
- You jump into the “off blue” widgets market where the buying and selling prices are much lower.
- Some combination of all of the above (which is what most companies do). There’s one key advantage to getting into a high-volume, low-margin market and that’s volume buying. Getting better pricing on everything you buy can significantly increase the margins on your premium products even though you’re still making thin money on the stuff that moves the most.
Note … none of these options involves you taking a hit on a loss leader. You’re in business to make a profit. Profit is non-negotiable.
And loss leaders just aren’t cool anymore.