Wednesday, December 18, 2013

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.

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.

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. 

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