Don’t Lose on Loss Leaders

By Laura Iles - Sr. Consultant, Integrated Insight

As I watch the ads this season, I’m reminded that loss leader strategies are a favorite holiday pricing tactic of the various establishments competing for our dollars. When used appropriately, discounting below cost can be a useful strategy for pulling repeat customers in the door, driving incremental sales, and establishing new clients. But this strategy is not appropriate for every business, nor for every occasion. Below, we’ll look at some of the critical factors to consider in determining whether this particular pricing tactic will achieve your goals.

Attracting the Right Customers

The first question is whether a loss leader strategy will attract the kind of customers that will remain with the company long term. While steep discounts can entice new customers with a low-risk chance to sample offerings, there is always the chance of drawing individuals who cannot afford to pay full price for the products / services once the offer is concluded, and have no intention of making incremental purchases on that first visit.

This is where market research becomes critical. Understanding existing customers and their motivations will enable the firm to decide whether a discount message of this level will be attractive. Price is not the only loyalty driver – Nielsen research demonstrates that globally, 59% of customers would be most enticed to switch brands, service providers, or retailers for an attribute other than price. Clearly, a dramatic savings message is not the only way to attract customers.

Maintaining the Customer Experience

Prior to execution, consider whether resources exist to manage the volume increases. Depending on how valuable the offer is perceived to be, the deal may end up attracting more customers than the firm is prepared to handle. A sudden spike in online traffic can crash servers and attendance increases may overwhelm stores. Consider whether a more modest savings message would be effective, while helping to preserve the customer experience.

Limitations

Specific limits around the campaign will help to prevent a devaluation of what current customers have already purchased. Loss leaders for specific times (Black Friday) or specific subsets of customers (local residents, particular email lists, etc.) will help to prevent a general weakening of your brand image, as well as shielding the firm from widespread losses if the strategy does not produce incremental sales. As time passes, it is useful to periodically review limitations for any ongoing loss leaders. There is always the hazard of training your customers to wait for discounts if such messages are provided too frequently.

Imaging

Think long term – does this tactic support the firm’s overall image? The danger with any loss leader strategy is the risk of creating a “discount” image. Many businesses utilize this approach successfully, just make sure it’s the most appropriate one for the company. Fencing the offers (e.g. limited time only, a subset of individuals only) will help to mitigate the discount appearance and retain value for the firm.

Create an Exit Strategy

As with any new strategic plan, be willing to utilize an exit strategy if the loss leader tactic is not creating the anticipated level of success. Develop guidelines around targets and time frames before implementation and establish metrics to use in evaluating success. You might cross-track elasticities to measure the impact a loss leader has on sales of additional items, as well as establish a process for tracking new customer retention. Discount messaging is an easy way to drive immediate sales, but determining whether it creates long-term profitability requires tracking the results.

Using a loss leader to drive penetration can be powerful, but it’s not the only pricing tactic available. Make sure it truly aligns with the company’s strategy and the customer’s needs before deciding which course to pursue. 

Inspiration in the Office

By Candy Parks - Director, Integrated Insight

There are people much smarter than me that have built a body of research on the psychology of office design and the impact on retention and productivity.  If you doubt me, follow this link:  http://www.facilitiesnet.com/designconstruction/article/Workplace-Design-Can-Help-Attract-Retain-Generation-Y-Employees--13859

All I know is that I like colors, and colors make me happy and boost my energy.  We read about this in medicine all the time – people focus their thoughts and their attitude and those positive thoughts have healing powers.  I believe office supplies have productivity powers!

Most women love to spend hours shopping for shoes at Nordstrom.  I, on the other hand, get my retail therapy in Office Depot.  Maybe because in one of my first jobs, I had to get office supplies from someone we’ll call Helga.  If I checked her resume, I think I’d find that Helga managed inventory for the Nazi forces.

If you needed pens, she informed you that black ball points were all you needed.  And yellow post-it notes fit the bill – the other colors were simply frivolous.  And according to Helga, the only binders fit for use were 2” and black!  Helga also thought colored file folders were from the devil.

Poor Helga would CROAK if she could see my office today.  Luckily, I now work in an environment where my leaders say, ‘Get what you need to do your job.’  Sooooooo, I have 3 ring binders in polka dots, paisleys, and bright stripes.  I put my most challenging projects in my favorite binders, and psychologically, that perks me up when I have to reach for that binder.  I have post it notes in every size and color and I use them all.  I have flair pens in 12 colors, and I have REAL pencils – not mechanical pencils.  Of course, my pencils are from Vera Bradley and are beautiful, but I use them happily and admire them as I do so.  I have note-taking books in bright yellow, pink, and lime green.  And my bookshelves are lined with colorful cloth baskets to store all my fun supplies.  When a project is done, I transfer it to a boring folder – not manila, but a boring solid color and put it away.  But while something is active, it LOOKS active on my desk or on my shelf.  And I feel active and energized while I work on it. 

Of course, there is a time and a place for everything.  No, I’m not going to take my bright polka dot binder to a corporate meeting – I’ll transfer to basic black – but I WILL take my purple flair pen.  If you’re a leader, please don’t underestimate the simple pleasures of office supplies and their potential impact on employee satisfaction and productivity.  It’s so much cheaper than redesigning your office and buying new furniture!

Pricing 101: Taking a Page from Pawn Stars

By Kirsten Snyder - Director, Integrated Insight

If you haven’t checked out the show Pawn Stars on the History channel, then you are really missing out.  The show follows about 3 or 4 items that people bring into the Gold and Silver Pawn shop in Las Vegas.  The items range from old military weapons to pop culture collectibles.  Think of it as Antique Roadshow, only at a pawn shop.  Besides the history you learn from the experts on the show, it teaches important lessons in pricing and maximizing profit.

Understand the price customers are willing to pay.

The pawn shop understands that they need to buy an item at the right price in order to be able to mark it up to make a profit.  In order to buy at the right price, understanding how much an end customer is willing to pay is critical.  Not knowing the price the market will bear runs the risk of overpaying and being forced to sell at a loss.  It can also lead to a slower than expected sales pace.

Understand the size of the market interested in the item.

Another important factor to consider when buying a product is how quickly the item will sell, otherwise known as carrying costs.  The pawn shop can estimate this by understanding how many people are interested in, or able to afford a certain item.  For example, if they buy a first edition Mark Twain Novel worth $10,000, management first has to project how many Mark Twain collectors are in the market and willing to spend $10,000.  Carrying costs are important to consider given money tied up in inventory isn’t available for purchase of new items.

The best channel may not be your own.

The pawn shop may buy an item that’s too good to pass up, but if they need a specific audience to sell to, then the pawn shop may not be the best place for the sale to take place.  Some items may sell quickest and fetch the highest price through a different channel.  For example, the pawn shop purchased a car driven by Steve McQueen in his last movie, The Hunter.  Because this item has a very specific audience, they considered how much profit could be made if they sold it through an auction, in spite of the auction fees.  The pawn shop knew they would have the best audience willing to pay the most money through this channel, as opposed to their own store.

The moral of the story, “Maximize profits by understanding your consumer.  Offer the right product, to the right customer, through the right channel, at the right time and price”.