Loss Leaders? I'm a Loss Follower!

Saturday, October 25, 2014

Debates are common when figuring out what to charge for a good, but I think it's far more interesting to hear folks ague about how pricing effects their decisions to buy.

I have a confession to make. I love loss leaders. Unlike "door buster" which is a meaningless marketing term, a loss leader is a bonified deal. Merchants price their loss leaders far below their list prices - even below the firm's own costs. This pricing strategy is used to lure folks into their stores where they can upsold on additional, high-margin goods. The theory is that these additional purchases will more than make up for the discounted loss leaders.

However, empowered by my studies of economics, I am immune to the marketers' tricks. Yes, my behavior is still influenced by loss leaders - I am more likely to buy them than other goods. However, rather than allowing myself to be upsold with other items, I end my shopping trips with bags containing the loss leaders alone. The loss leading strategy fails in the case of this educated shopper, and the stores wind up losing money on me.

Am I a jerk for seeking out loss leaders? Certainly not!

I'm not performing an illegal or immoral act. I'm merely making purchases of goods at their stated (and intended) prices.

The fact that I am not acting as the store's pricing experts had hoped is irrelevant. If they wanted to require their customers to make other purchases, they could have used the bundled pricing tactic (described in my pricing book). They do not. Such requirements would likely lessen the halo effect of the advertisers.

Some have argued that there is an implied social contract, in loss leaders, but there is no such thing. When a producer selects a pricing strategy, he has to live with the consequences. Should the consequences prove undesirable, he should select a new tactic.

If pricing specialists really felt like making a profit on each sale was important, they would simply price each product accordingly. If they don't know how, well... there's always Charge Like a Rhino.