Price sensitivity in the Minor Sale and optimizing profits for retailers
June 23, 2006
I was pleasantly surprised to read in Forbes magazine a story about an up and coming software suite that allows retailers to use price optimization to boost sales and profit margins.
Demand Tec has developed software that gives retailers insight into underlying factors in the purchasing decision. For example, one drug store chain used the software program to recognize that buyers seeking cough medicine aren’t likely to shop around. The store raised prices on cough syrup as a result. The software also provides other insights, such as customers who are buying cold medicine also purchase chicken soup and tissues in the same visit. The software then recommended that tissues and chicken soup be moved to the cough syrup aisle.
The software can’t recognize external trends, such as a new Wal-mart opening down the street, but it does help pull retailer’s heads out of the spreadsheets and get them to focus on their customer and why they’re visiting a particular store. One store implemented the software suggestions and increased the price of diapers for newborns while cutting the price of diapers or “pull ups” for toddlers. The pricing move boosted revenue for baby care by 27%and increased the category’s gross margin by 2% after a year!
For those of us who avoid spread sheets when possible, it’s rather obvious the reason why parents of toddlers are more price sensitive than parents of newborns. In the months following the arrival of a new baby (or babies), time is second only to sleep in the precious commodity category. As time goes by and the number of diapers bought and changed multiplies exponentially on a weekly basis, it makes sense that the parent of a 28 month old might be willing to shop around for recurring minor sale expenditure such as diapers.
Which brings us to the door buster theory in Beyond Niche Marketing, the book? It’s all about merchandising. Realizing why customers are coming to you and placing your merchandise accordingly. For example, the article at Fortune notes that a drug store positioned tooth-whitening chewing gum to sell along side with the stores other chewing gum offerings. The software suggestion was to move the tooth whitening gum to the oral care products aisle. When positioned next to the whitening toothpaste and tooth whitening strips, sales of tooth whitening gum increased significantly.
While it’s great to have a software tool that can “think” for you, there’s still no substitute for a real live human being stepping into the customer’s shoes and viewing the shopping experience from the other side of the cash register. The definition of the Minor Sale is that it’s a purchase that doesn’t justify a huge expenditure of time and effort researching alternatives. Because the software can only make suggestions. the humans who run the business have to pick and choose which software recommendations make sense for their customers.
The myth of the captive audience….part deux
June 19, 2006
Over the weekend, I saw a news story about Bus Radio, a Massachusetts start-up that offers to pipe music (and ads) into school buses around the country via a private radio network.
The concept is simple. Schools can sign up for this private radio broadcast to play on school busses featuring programming aimed specifically at teens and tweens. During the piece, parents were featured voicing their concerns over the fact that their little angels will be forced to listen to advertising during their bus ride to and from school. “Who knows what he’ll come home demanding,” one mother responded.
Finally, we’ve found the elusive truly captive audience. Hooray!
Oh, but wait, the little buggers will still have access to the iPods and PSPs tucked inside their backpacks. AWWWW!!! Turns out the audience still won’t be truly “captive,” they’ll just be immobile. Once again, there is no such thing as a “captive audience.” If you fail to craft your content to be compelling and selling; to break through the clutter and reach a specific audience, then expect the ads to fail as well.
But I think this story shows us the innate POWER radio has to move and to motivate. Everyone has experienced the song you can’t stop running through your mind… and that’s what radio offers. Radio literally sneaks in under the radar and can plant seeds you didn’t know were being sown. Think about it.  Have you ever seen a story where parents are complaining about ads in the yearbook or ads in the school newspaper or even ads on the athletic programs? Of course not. Advertising in those media are considered to be “harmless.” However, now that a company has decided to create programming for a tightly targeted audience via one of the best “suggestive” media known to man, and suddenly it’s a subject worthy of news coverage.
The parents have a right to be concerned, but it’s not because their children are being held “captive,” which the story suggests. Instead, those children are being tightly targeted and their parents have reason to fear. Bus Radio is creating a tightly targeted audience will provide truly effective marketing message delivery via the most insidious path to your mind: radio.
Heads up; If you want to reach tweens and teens with your product or service, Bus Radio would be a great choice for your tightly targeted, compelling and selling marketing message.
Audiences were never “captive”…
June 17, 2006
According to Mike in his blog at Techdirt,
It’s amazing how slowly it takes folks like advertising execs to catch on sometimes. For the past five years, plenty of people have realized that there was so much content out there that people were learning to only deal with content they wanted. What that means is that dumb ads that no one cares about don’t work at all. Advertising needs to be content that people want to see or interact with. It’s not about forcing people to see your ads any more, but about making people want to see your ads. Of course, if you don’t realize this, then the rise of the internet, video games, and DVRs seems scary, because it takes away from the way things have been done in the past. However, the folks who do realize this, know that this isn’t scary at all, but a huge opportunity to create better content that has a higher likelihood of actually having an impact on the target audience.
Mike is offering powerful insight here. However, I must correct him slightly. “Dumb ads that no one cares about” have NEVER worked. Audiences have never been “captive.” Mankind has always used the commercial breaks to attend to other business.
NEWSFLASH: Even if it were possible able to hold an audience captive, to physically strap them into chairs with their eyes taped open so they were forced to watch up to eight :30 commercials back to back, a dumb ad that no ones cares about still won’t work.
ADVERTISING HAS NEVER FORCED ANYONE TO BUY ANYTHING!
Audiences have never been captive and smart advertisers have known this all along. It’s why beer commercials have featured beautiful young women in their ads since the beginning. It’s why advertisers in the past and present pay incredible sums of money to actors and actresses to appear, either in person or by voice, in their advertisements. The reason for celebrity endorsements? To try to keep audiences glued to the screen or the station. Audiences have never been captive, so why the fuss?
Honestly, the fuss is with those who buy and those who sell the advertising. See, advertising in any media has always been sold by the size of the audience. More viewers = more $$$. Now, with the rise of DVR, advertisers are trying to negotiate on the rates. “But the audience isn’t captive anymore! You can’t guarantee me a captive audience so I won’t pay as much.”
Reality check. The audience was never guaranteed. The burden has always fallen on the advertiser to keep the viewer engaged. When you think about it, the television or radio show has already done its part. The show has DONE its job of attracting a huge viewing/listening audience. Mr. Advertiser or Ms. Agency, it is now YOUR job to keep them engaged.
The audience was never captive and everyone knew it. The media (television, radio, newspaper, billboards) knew it and knew there was no way to guarantee “captivity.” The advertisers should have known it, and if they didn’t they were just fooling themselves. Most importantly, the viewing/listening audience knew it.
If you’re creating ads that have nothing to do with the audience’s GDP, then expect to those ads to fail.
Mike has hit the nail on the head. There has always been “a huge opportunity to create better content that has a higher likelihood of actually having an impact on the target audience.” Creating content with your target market’s GDP (Goals, Desires and Problems) in mind and you’re well on your way to creating an impact.
Apple’s wonderful series of ads
June 13, 2006
Buying a computer falls under the major sale category, which means:
- There is more than one decision maker
- There is significant financial/emotional investment on the part of the buyer
- The purchase warrants significant time and research into alternatives
- There is the potential of a long-term relationship between you and your customer
- The consequences of making a purchasing mistake are high.
By running a series of clever ads, Apple is showcasing their “solution” to computer users “problems”.
Each television ad features two male actors. (Click on the image below to go to the web page for the campaign.) The actor on the left represents PCs while the actor on the right represents Mac computers.
While I’ve been amused by the campaign for quite some time, the ad jumped because my daughter, who just graduated from high school and is 8 weeks away from starting college, saw one of the ad as she was watching television this morning. Upon seeing the ad, called “Out of the box”, my daughter announced that she wanted a Mac.
I could be hurt. After all, we’ve had at least one PC in the house since she was 7. Right now we have four pcs, three of which are laptops. I’ll admit, I had visions of her taking one of the laptops with her to college instead of adding yet another item to the ever growing list of “college necessities”.
But once I pushed my feelings aside, I realized how pursuasive those darned Mac ads are and how well they address the “problems” of the average computer buyer and how effectively they planted those seeds… one ad at a time.
- “Out of the box” tackles the “problem” of setting up your new computer after purchase. “
- “Touche” tackles the “problem” of purchasing all new software because everything you have runs on PCs not Macs.
- “Work vs Home” tackles the “issue” of why most people actually buy a computer. Most people buy a computer to play music, work with pictures and edit home movies, etc.
Lessons to learn from the Apple Campaign:
- Identify the problems:
Apple not only identified the “problem” their potential customers had in purchasing a Mac over a PC, but they also identified the “problems” their potential customer is now having since they purchased a PC. Oh, and they over came a HUGE one which was allowing Macs to run MS Office applications. - Illustrate the solutions :
Apple illustrates their solutions through the catchy television spot. - Recognize that this is a major sale:
Apple doesn’t try to overwhelm you with the catchy television spots. They don’t barrage you with information. Each spot as a “focus”. Want to learn more? Type Apple Advertising into Google and there’s the web page with ALL the information you might need to make the leap in a nice, easy to access form. - Recognize the best use of each media:
Television is a good “introduction” medium, but Apple uses the website for those who want more information.   Instead of trying to use one 30 second spot to illustrate ALL the advantages of purchasing a Mac, they focus on just one per ad. If you want to know more, visit the website. The old “one-two punch”.
The thing is, Apple really has done a GREAT job of identifying the “downs” of PC ownership in those ads. Gee… after watching the ads and reading the web site copy, maybe my daughter’s computer for college will be a Mac.
Radical Innovations in Marketing
June 9, 2006
The Center on Global Brand Leadership at Columbia Business School and Corante held The Innovative Marketing Conference in New York City recently. According to the promotional literature promoting the conference:
Companies today are facing increasing pain points as marketing struggles to keep up with innovations in the marketplace. Media proliferation, product choice, consumer networks, “the TiVO effect†— all are posing immense challenges to the old ways of building brands.
At the same time, radical innovations in the practice of marketing are turning the field on its head. Search marketing, viral marketing, customer experience, word of mouth, mobile communications, customer involvement – each has shown promise for building incredible value. But can these cutting-edge new tactics really work for any brand? And should we really throw out the ad agencies—when the best campaigns are still generating incredible buzz, brand awareness, and bottom-line growth?
As I read the literature, I have to laugh. Customer experience, customer involvement and word of mouth are considered “radical innovations� What ivory tower have these people been living in for the last 5 or so decades? Word of mouth advertising is NOTHING NEW!
Customer experience and customer involvement have factors for DECADES! Suddenly, providing a pleasant customer experience is considered a ” cutting-edge new tactics”! Not only that, they speculate whether such ” cutting-edge new tactics” can really work!?!?
If you’ve read my book, you know I have little respect for the marketing experts who spend their days inside the hallowed and quiet halls of either an ad agency or academia. It’s hard to know what’s going on out in the world when you don’t spend any time there. I am always amused when the self proclaimed “leaders” in marketing suddenly discover what those of us laboring the trenches have known all along and thought was common knowledge.
When my husband was a teenager, he worked summers as a mason’s tender. That meant he mixed mortar and lugged bricks, blocks and mortar up to the bricklayers (or masons) who were perched on scaffolding as they were creating the structure. One of his favorite stories from that time was when he overheard a conversation between the architect and the construction site manager. In essence, the architect was throwing a FIT because the structure wasn’t being built to his specifications. The construction workers were destroying the integrity of his design.
In response, the construction manager was trying to explain how the laws of physics (not to mention the laws of code enforcement) wouldn’t allow the workers to follow the architect’s design to the letter. The construction workers were the ones who had to make the design “work” in the real world.
Ah, the harsh realities of the “real” world. It’s not just architects who get frustrated when those realities meet head on with their fragile ideas. I wonder if architects have conferences where they go to whine when that happens as well?
Creating Commodity Customers or Sell more products to existing customers
June 2, 2006
For the past few days, I have been blogging my frustration at yet another millionaire mind marketing guru who promises the secret formula for success.
In a nutshell, the author’s formula boils down to the following:
1. Get your message in front of more eyeballs
2. Get more money per eyeball
3. Sell more products to your existing customers on the back end
I’ve already ranted about the first step to wealth and riches which is, Get your message in front of more eyeballs.
Seems getting the message of a lousy business model with no appreciable benefit to the customer in front of as many eyeballs as possible is NOT the key to success, as is evidenced by the dotcom bust of a few years ago. (It’s amazing how short people’s memories can be…)
Then I took offense at Step 2, which admonishes you to get more money per eyeball. While Step 2 had promise of being sound advice, it turns out it is yet another popular millionaire mindset gimick of trying to get you to raise your prices so you’ll make more money. I’m not against making money. I am against raising your prices soley with the intention of building a healthier bottom line. I’ve raised my prices in the past with the goal of weeding out a certain class of client (the money for nothign crowd). Obviously my rates aren’t high enough yet because I still have a few of those on the rolls.
Which brings us to Step 3: Sell more products to your existing customers on the back end.
FINALLY! A granule of sound advice. I am amazed at the number of companies who treat their customers like they’re a commodity. I’ve had so many personal experiences at being treated like a commodity customer in just the past few months that I am truly beginning to feel like Will Ferrel’s character Mugatu in Zoolander, "Doesn’t anybody notice this? I feel like I’m taking crazy pills!"
Doesn’t anybody recognize how expensive it is to land a new customer? Why would you even ATTEMPT to land a customer if you don’t plan on continuing the relationship with them? It goes without saying that the absolute fastest and easiest way to grow your business is to increase your customer retention. If you currently retain 70 percent of your customers and you improve that to 80 percent, you’ve instantly added an additional 10 percent to your growth rate. Yet many companies continue to treat their customers like an easily replaced commodity. Do they forget the fact that a satisfied customer will tell three others about your business but a dissatisfied one will tell 15? Are they forgetting the fact that the world wide web is now a wonderfully effective option for the disgruntled to vent their ire to increase that double digit figure into a number with at least one if not two commas? It’s easier to sell an existing customer than to win a new one. And what’s the point of winning new customers if you’re going to lose them?
You’re just not charging enough.
June 2, 2006
The other day, I blogged my frustration at yet another millionaire mind marketing guru who promises the “secret formula” for success. In a nutshell, the author’sformula boils down to the following:
1. Get your message in front of more eyeballs
2. Get more money per eyeball
3. Sell more products to your existing customers on the back end
I’ve already ranted about the first step to wealth and riches which is, “Get your message in front of more eyeballs”.
Seems getting the message of a lousy business model with no appreciable benefit to the customer in front of as many eyeballs as possible is NOT the key to success.
Today, I’m digging into step 2, which admonishes you to get more money per eyeball.At face value, it appears this is sage advice. Increasing the effectiveness of your marketing is a WONDERFUL way to grow your business. Unfortunately, having read the promotional material for the book, step 2 is not geared towards increasing your % of sales but instead focuses on raising your price to get all you can. This is yet another popular “millionaire mindset” gimick.
If you want to make more money then just CHARGE MORE for your product. After all, by raising your price, you’ll merely be charging what your product or service is WORTH!
In other words, if you’re charging $100 per item or hour and you want to increase your profits, just raise the price to $150. People will continue buying at the higher price point and YOU will rake in even more money.
I have a problem with this mindset and it’s probably rooted in my days as a wage slave. Long ago and far away, I worked selling advertising for a big newspaper chain, and it was just this type of thinking made the advertising staff’s lives a living hell.
Understand that every ad that runs in the newspaper is measured by “inches”. The formula is width X depth. So an ad that is 6 columns wide and 6 inches deep is considered to be 36 inches. (The fact that each column is slightly more than 2″ wide doesn’t enter into the equation. A 6X6 ad is rectangular in shape, not square as you might think.)
As advertising sales reps, our sales goals were based on the number of inches we had sold the previous year, not the dollar amount of the sales we generated. The publisher (who is the CEO of the newspaper) had a very simple view of budgeting: If an ad in the paper was $10 per inch last year and you sold 40,000 inches last year, then if he raised the rate to $20 per inch then the paper’s revenues would double. Add in a nice 20% increase on last years number of inches sold and BINGO! There was the advertising revenue budget for the year. Our individual goals were set thanks to a nice easy formula.
The problem in his logic? My clients weren’t buying ads by the inch. As a matter of fact, the first question my clients would ask was “how big of an ad can I get for $300?” Clients set their advertising budgets by dollars not inches. No one was buying X number of inches in advertising!
When the rate doubled (as it did every year I was there), the ads clients ran just got smaller. Try as we might, over the years we were never were able to communicate to the publisher that his logic was flawed. The last I heard, he had bounced around several papers and at the last report he was at a tiny paper deep in the Midwest, probably still setting goals for his advertising department using his “simple” system.
On the other hand, one can look at America’s largest retailer and see that the key its success was and continues to be viewing the pricing model from the CONSUMER’S EYES. Sam Walton believed it was better to make 5 cents on the dollar and sell $500 worth of merchandise than to make 20 cents on the dollars and sell $100 worth of merchandise. Sam believed that consumers would buy MORE if they percieved they were getting a deal. The years have proven that Sam had the right idea.
Make less per sale but sell more.
Sam didn’t invent this theory by the way, Henry Ford had a similar approach earlier in the 20th Century.
It seem the best ideas aren’t “secret” but rather mundane. Then again, I guess the “Marketing Master’s Manual of the Mundane” wouldn’t be climbing the charts on Amazon’s top selling titles.
Is more really less?
June 2, 2006
I am frustrated. I’ve been directed by a client to yet another “millionaire mind marketing” guru who promises the “secret” formula for success. In a nutshell, the author’s “formula” boils down to the following:
1. Get your message in front of more eyeballs
2. Get more money per eyeball
3. Sell more products to your existing customers on the back end
If step one were truly the foundation for success, then the sock puppet for Pets.com would still be promoting, well, Pets.com.
Now, I’m certain the author of the above “formula” would argue that Pets.com’s explosive failure was due to not executing steps 2 and 3, because looking back, Pets.com did an EXCELLENT job of executing step one. They did SUCH a good job that the sock puppet was still working promoting other businesses for YEARS following Pets.com’s very public demise. If more eyeballs was truly the foundation of a successful business then Pets.com would be thriving today.
But it’s not.
Despite the fact that Pets.com purchased a 30 second ad during the Super Bowl, which is considered to be THE premium method of grabbing eyeballs, the company still shut the doors less than 10 months later. Despite the fact that Amazon owned 30% of the company, they still folded. While the Super Bowl spot landed the sock puppet top of mind awareness, Pets.com wasn’t able to capitalize upon their successful capture of all those eyeballs.
Hindsight is always 20/20 and it turns out most of the dot.com e-tail stores (including pets.com) were not able to offer a compelling reason to shop online. Turns out that it didn’t matter how many “eyeballs” Pets.com captured, they still couldn’t offer a compelling reason for customers to shop at their online store.
In my book, Beyond Niche Marketing, I suggest a “better” way. Rather than try for more eyeballs, try reaching your prospective customers via their ears. Ever notice how you can stare at a page in a book for hours yet not absorb a bit of information, yet you can hear a song or jingle and remember it, without trying, YEARS later. Yeah, that’s the power of touching your target customers via their ears instead of their eyes.
Walking through the major sale
June 2, 2006
It all began innocently enough. I was dropping off paperwork to an office in a strip mall when I saw the sign which read, “Exotic Birds”. A few weeks later, the kids were in the car and we had time to kill between sporting event practice so we stopped by the exotic bird store for entertainment purposes.
I should note here that we are not totally inexperienced with birds. About 8 years ago we acquired a cockatiel for my daughter from a friend of a friend who happened to own a male and a female bird and had allowed nature to take its course. As a result, we had a brief but unhappy bird ownership experience. In other words, as a result of our first experience, we now knew that we didn’t know anything about birds.
Much to my surprise, our previous “foul” experience hadn’t cooled my daughter’s ardor. In fact, my youngest (who was too young to remember the initial bird experience) also discovered during that visit that he shared her love of winged creatures. As a result of our visit, the wheels were set in motion for a major sale; the acquisition of an exotic bird.
All the criteria for a major sale were present in our decision.
- There was more than one decision maker.
This was a family decision. Of course, the kids and my husband were sold LONG before I joined in.
- There is significant financial/emotional investment on the part of the buyer.
Not only was the financial investment significant (I should have known that “exotic” = $$$$$) but the emotional investment level was high as well. We’d fallen in love with a bird before only to have our hearts broken when she died.
- The purchase warrants significant time and research into alternatives.
I’ll admit that I looked into adopting a special needs orphan refugee as an alternative. While it appeared that decision would cost less and be less disruptive than adding an exotic bird to our family, the kids and my husband insisted upon the bird instead.
- There is the potential of a long-term relationship between you and your customer.
I had no idea coming in how much “relationship” would be involved in this transaction.
- The consequences of making a purchasing mistake are high.
SKY HIGH, as in broken hearts and years of therapy high. If we screw this bird up, not only will my children be emotionally distraught, but I’ll NEVER be able to sell him for what we paid for him initially.
I recognized our descent down the path to the major sale from the second visit to the bird store (which was really just a breeder who had rented a space in the stripmall and supported her bird habit with careful breeding and the sale of cages, toys and food) so I kept track of the process.
Since my husband had to be included in the decision, we tried to stop by the store front one evening only to discover the store was closed. (Like I said, it’s not a “real” store with “real store” hours.) However, the web site address was painted on the store windows. www.fantasticfeathers.net
Turns out, Fantastic Feathers is the name of the store. However, in a BRILLIANT marketing move, the store owners ordered their signs to read “Exotic Birds”. I know that I wouldn’t have brought my kids to “Fantastic Feathers” but I did bring them to “Exotic Birds”.
The Fantastic Feathers website is not superbly designed by any means. Images are missing and the design is crappy, but the information contained within was EXACTLY what we needed. Not only was there a list of the birds available but there were also descriptions of each type of bird. There was more than enough information there for us to decide to try to visit during the less than convenient hours of operation.
We made several visits to the store and even more visits to the web site during the next few weeks. We searched and we read and most importantly, we talked. We talked to the breeders at the store. We talked to friends and neighbors. In the end, we bought a bird from these breeders because of their extensive knowledge and experience… which they first relayed to us via their website.
It took us almost a month to put down a deposit on our hatchling. Then we waited two more months while we waited for little Beldar to be ready to come home with us. To say I was petrified wouldn’t describe the level of terror I felt. I would have felt more comfortable bringing home the special needs orphan refugee.
In the end, the store’s web site was the most influential factor on our decision to purchase the bird from this breeder. We visited other bird breeder and bird store websites in the area. None of the other store web sites showcased their “expertise” on their web site and therefore, we didn’t even try to visit the other stores. While one other competitor actually listed on the site birds for sale and their prices, there wasn’t the other essential information we felt we needed to trust them with our purchase. By the way, the breed of bird we chose was listed as costing 20% LESS on this other bird store website.
Perhaps it was the wealth of information available at Fantastic Feathers or perhaps it was our “foul” experience with another “bargain basement bird”, but in the end we paid a premium for our beloved Beldar, a Rose Breasted Cockatoo.
If you’re in the business of making a ‘major’ sale, don’t underestimate the power information plays in making the sale. Your web site is a great way to showcase your expertise by sharing information potential buyers need. Filling your site with articles, how to’s and top 10 lists really do help to convince visitors to take the next step and walk into your store. Studies have shown that a majority of customers will search for and try to visit your web site BEFORE visiting your store. It’s also been estimated that only 1 in 10 web visitors who become customers will actually use the web to complete the transaction. That means, if you have a brick and mortar store with a web site, for every online “sale” you make, there are as many as 9 “physical” sales that are the result of your web site. However, keep in mind your customers probably won’t mention this fact to you. It’s rare for the average customer to think about much less reveal that they visited your web site before making the decision to walk into your store.
Choosing the right loss leader product
June 2, 2006
The definition of a Loss Leader item is something that you’re selling at or below cost and heavily promoting. It doesn’t matter how you promote it. You can use any combination of via Pay per click, newspaper or purchase air time on radio or television, the tactic is to slash the price of a single item and then promote it like crazy to get attention in an over crowded media marketplace. In “Beyond Niche Marketing” the loss leader promotion illustrated in the book involves drug stores selling milk.
A conversation with my mother, of all things, brings the loss leader marketing tactic and brought to mind the type of product that should NEVER be featured as a loss leader.
My weekly call to my 70 year old mother last week finds her shopping online for “stevia”. Stevia is an herb that’s advertised to be “sweeter than sugar”. It’s non-caloric and is a favorite among diabetics and dieters. My mother is a life long member of the latter group and is still fighting the fight to fit into her wedding dress some 45 years later.
So our tale begins in the middle of rural Indiana, where there’s a 70 year old woman who is frustrated by the fact that a few months ago she purchased Stevia online for approximately $4.00 per box and now she can’t find it anywhere at that price. She had searched the web store where she made her original purchase and, at the time of my call, had abandoned that search and headed out in the wilds of the internet in search of Stevia for $4.00 per box.
In an effort to make conversaion, I began explaining to my mother that the fabulous $4.00 per box purchase price was probably a “loss leader” promotion. The business in question probably purchased a Google Adwords ad which my mother clicked upon, found the herb offered at an INCREDIBLE price and, as a result, she bought 3 boxes. The promotion was over and my mother should abandon her quest and get back to our conversation.
My mother wasn’t having any of that. (Tell me you don’t have conversations like this with your mother too.) What she did care about was she had bought Stevia at $4.00 per box three months ago and by gum, she wasn’t going to pay twice that much for it now.
The conversation with my mother ended but it got me thinking it was time to explore the topic of why some products SHOULD NEVER be used as loss leaders.
In economics, DEMAND is the amount of a good that consumers are willing and able to buy at a given price. According to Biz Ed, there are 5 factors that come into play which affect DEMAND for a good:
1. the price of the good;
2. the income of consumers;
3. the demand for alternative goods which could be used (substitutes);
4. the demand for goods used at the same time (complements);
5. whether people like the good (consumer taste).
We could spend weeks on this topic, so for now we’re going to focus our attention on the third item from the list, the demand for alternative goods which can be used as substitutes.
When there are a LOT of alternatives for a good, then the demand for that good is said to be elastic. Conversely, items that don’t have acceptable alternatives or substitutes are said to be inelastic. Think of rubber bands. Big fat thick ones with very little give are inelastic -vs- thin rubber bands with LOTS of stretch are elastic.
Gasoline is a product whose demand is INELASTIC. It’s rubber band is very thick and very “no-stretchy”. This is because there is no substitute product for gasoline. Our cars are built without alternatives in mind, so the demand for gasoline is said to be inelastic.
While gasoline as a product has demand that is very INELASTIC, which gas station you use to fill up your car is HIGHLY elastic. If station “A” is offering gas at $2.86 a gallon and right across the street, station “B” is offering gas at $2.96 per gallon, which gas station is going to have customers lined up around the block? This is because demand elasticity for individual gas stations is very ELASTIC.
1. When you’re choosing a loss leader product, be sure to choose one that has inelastic demand.
Milk is the example used in the book as a potential loss leader product. Milk is considered inelastic because there are no good substitutes, it is a necessity to most people, and it represents a small proportion of most people’s weekly food budget.
While there are other substitutes available for milk, try mixing any of them with chocolate milk mix and see if your 5 year old doesn’t notice the difference immediately. The demand for milk is said to be inelastic because substitutes are more expensive and not easily slipped by without notice on the typical 5 year old’s palate.
Back to the web store selling stevia. This web company made an obvious mistake by featuring as a loss leader a product whose demand is highly elastic. While my mother prefers stevia to other sugar substitutes, when the price doubled, she quickly abandon her search for stevia and headed straight to the little pink/yellow/blue packets of artificial sweetener offered at her local Supercenter.
2. Make certain you stick with your loss leader campaign long enough to establish your relationship with your customers.
Unfortunately, the herb web company positioned itself as a commodity broker of herbs. They won the battle by momentarily offering the lowest price but they lost the war. When their customer returned and found the price had doubled, she beat a hasty retreat. The loss leader promotion not only failed to win a customer, it garnered her ire and she’s now calling her other herb consuming friends complaining about the injustice suffered at this site.
The online herb broker tried a “quick hit” campaign, toying with the idea of offering a loss leader. Not only was the demand for their PRODUCT very elastic, but the demand for their STORE was also very elastic. In other words, not only were there lots of acceptable substitutes for the PRODUCT but there were also lots of acceptable substitutes FOR THEIR STORE.
This is a lethal combination.
Pat attention to what your local grocery store does in promotion. Your local grocery stores are most certainly the local JEDI MASTER of the minor sale. If you’ll notice, when your local grocer runs a loss leader product, the ad copy will usually specify, “Limit 2 with $20 purchase” or something to that effect. They frequently implement the loss leader marketing tactic as a way to maintain their market share.
Watch your local grocer’s marketing efforts and see if you can point out the “loss leadersâ€. While the loss leader products may change, the strategy doesn’t. Notice that most grocery stores are carefully positioning themselves as selling a lot of PRODUCTS who have high demand elasticity but the stores are carefully moving themselves into a position of low elasticity. In other words, you probably have a favorite grocery store and it’s because that store has done something to position itself as your favorite. Whether it’s the fresh seafood, the olive bar, the selection of exotic produce, or the deli selection, your favorite grocery store is doing everything it can to position itself so you won’t travel 10 minutes down the road to the next grocery store.
The online herb store, on the other hand, didn’t do anything to “hook” their customer. When they abandoned their loss leader tactic, there was no reason to shop there anymore. By not designing their web store to encourage add on purchases, they set themselves up for failure.
So use caution when choosing your loss leaders for your minor sale campaigns. On the web, set up your shopping cart to offer “customers who purchased “X” also bought..” messages. Amazon, the Jedi Master of minor sales on the web, combines this strategy with offering free shipping for orders over $25.
On or off the web, make sure your customers know the loss leader product is being offered at a special sale price and when the promotion will end. It’s good to rotate staple products as loss leaders to keep customers coming back for more. Just make sure the offer is clearly defined and if necessary, clearly spell out the conditions of the sale. You’ll find your customers won’t mind buying $20 worth of merchandise to save $2.00 off of a $6.00 product and you’ll find that loss leaders can indeed make a profitable contribution to your bottom line.
The Loss Leader tactic is a classic promotion for businesses making minor sales. Just make certain you’re committed to the strategy before you begin.
