Is a loss leader sustainable? Answers
Is a loss leader sustainable?
Recap: Rashima Karden and Bill Dunbar of retailer Zap Electronics created a customer acquisition program centered on deeply discounting its new ZapAccess Tablet. The goal was to get new customers into the store to purchase the ZapAccess, and compensate for the loss leader with higher-margin items like the warranty and accessories. Sales were better than expected, so CEO Jenna Savas wanted a reforecast of sales projections and an updated marketing plan.
Karden and Dunbar met with the production and marketing teams, ran some numbers on production and pricing, and prepared a plan to present to Savas. They were confident that she would approve.
December winner: Michael Smith, Designer, Tri-Win Digital Print & Mail Services
First, it's very important not to alienate current customers.
Offer anyone who purchased a tablet within the previous month credit towards any Zap accessories. Since they paid full price for the tablet, and the accessories have a high margin, offering credit to those customers is a good way to give them something of value, keep the costs of keeping those current customers happy low, and get those customers to feel that their tablet, and perhaps the whole ZapAccess brand, has more value since it can do more with more accessories, and those accessories may work with other ZapAccess Products.
Second, lowering the price of the tablet permanently would send a message that the quality of the product is lower than was initially implied, and would make sales around the holidays less lucrative. Instead of reducing the out-of-pocket expense to the customer, incentivize the purchase of the tablet: “Purchase the Zap Tablet and receive $50 in free accessories.”
Both parts of this plan focus on offering a great retail value to the customer while keeping the actual costs of promotions low for the company. In addition, by helping the customer purchase accessories when they go to replace the tablet or are in need of another high-tech toy, [the customer] may realize that it's cheaper to buy the same brand of electronics since they don't need to by a whole new set of accessories to work with a different brand of gismo.
Alyson Lex, Copywriter and marketing strategist
If I were Karden and Dunbar, I would not use the tablet as a loss leader to begin with. I would instead bundle the tablet with a set of starter accessories. Even though these are high-margin items, the stores would still be able to upgrade the consumer to “premium” accessories and still offer warranties and apps to keep their high-margin items in play.
By bundling the tablet with the starter accessory pack for the same price as the competitor's tablet alone, I'm adding value for my consumer without cutting prices.
Peter J. Mendelson, CMO Binder and Binder
A loss leader is certainly not sustainable when it represents your primary product sold.
Often, peripheral products can be loss leaders as a way to drive consumers into brick-and- mortars or digital shopping experiences, building the house list. This is quite different from alienating your valued customers with price decreases on your primary product sold for short-term “wins”—and risk waking up the sleeping giant that is negative social media, which will ultimately diminish the brand and cause the board to search for a new CEO.
Reach out to those disenfranchised from social media and offer them gift certificates they can use to purchase your accessories or apps. This will promote word of mouth, reversing the negative effects of short-term stupidity.
Instead of aggressive price cutting, maintain the price point—and promote everywhere that no one will get a lower price no matter where they shop. This is very comforting to consumers. For this to be effective, you also need to provide a superior customer experience…all the time, everyday. This needs to be engrained in the corporate culture. This is the plan that will lead to long-term success for Zap Electronics and should be presented by Dunbar and Rashima and embraced by CEO Savas.
Scott Rogers, customer evangelist, SRc
In my opinion, further analysis is important. A quick analysis of the proportions of customers who purchased the tablet on sale who were new customers versus existing customers would show what was added to Zap's customer base. In addition, an analysis would show how many customers it moved forward, and gave away margin dollars.
If the customer base grew, then the additional analyses of the future impact should include the potential increased revenue from future apps, and the future conversion of the base to the next generation ZapAccess Tablet (or other future product lines).
Despite the strong sales from the deep discount, a permanent loss-leader pricing strategy can have short- and long-term negative effects. The price-value perception is based on the anchoring price. A price change would impact the perception of quality (once the initial price anchor is gone). It would also further alienate the existing customer base who paid full price—and could potentially lead to Zap's existing customers waiting until the retailer “permanently discounts” the future product lines.
If Zap Electronics had added new customers to its database (and not significantly moved exiting customers forward), then an occasional “deep-discount” sale would be a good strategy. Yet, don't let the cadence be predictable. Customers might delay purchases to cherry-pick.