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Forget Loss Leaders; Profit is Non-Negotiable

Tug-of-war

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:

  1. You stay in the premium “pure blue” widgets market. Build your brand; offer your best price and that’s final.
  2. You start grinding your suppliers for a better price or find more cost effective suppliers.
  3. You jump into the “off blue” widgets market where the buying and selling prices are much lower.
  4. 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.

NoteĀ … 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.

Denouement
 

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3 Comments

  1. You make some good points, but where do you think the music industry might fit into a scenario like this? It’s hard to stay away from a loss leader model when all recorded music has essentially become free anyway. Additionally, the cost of making a record is cheaper (but still relatively expensive). What many artists are doing is giving away the music for very cheap or free, in order to drive people to the live show and sell merchandise. Which is a loss leader way to do business. There are literally thousands of opinions for how to deal with this change, but what do you think?

  2. Hey Stinson,

    Great comment – makes me think! In my mind this is all about perspective. You’re right, the music industry is changing. And it has to … there’s just no going back.

    I know some musicians who just refuse to put songs out there that haven’t been recorded in a professional studio. That costs money. And every one of them has a home setup where they can record music basically for free. And the real truth is nobody listening to it (except them) would be able to tell the difference.

    It’s getting over that perfection wall that’s the real hurtle. I’ve done some graphic design and drawing/painting. It’s hard, I know. But this is business and it has to be done. Especially in the beginning.

    From there you look at a CD as two things:

    1. It’s the work that went into building the material for the live show. The show and the merchandise are the product. The album is the research and development of those products.

    2. It’s a promotional item, just like a poster or an advertisement. And you use it to help build your brand and get people to the show.

    So I wouldn’t think of it as a loss leader. And that’s the key. To survive in a changing world, you have to change your thinking. ;)

  3. Shane-

    Thanks for your thoughts. “To survive in a changing world, you have to change your thinking.” That’s so true, and integral for the future of the music business.

    I like your idea of thinking of the recording as part of the R&D process of the performing act’s career. As far as using the recording as a promo item, that is pretty much the approach we are taking now. We are thinking of the recording as a sort of “electronic business card.”

    It’s a shame your friends won’t release material unless it’s been recorded in a professional studio. As a former staff member of a recording studio, I have seen all kinds of results come out of these high caliber facilities. It’s all about the song, the performance of the song, and who is operating the gear; not the gear itself. A hit song is a hit song. Period. All that being said, a healthy dose of perfectionism is important. In the end, you just have to let go and be done though.


 

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