Winning with Loss Leaders

Discussion
Nov 01, 2010

By Tom Ryan

An article in SmartMoney explains how retailers
make money on 50-percent-off deals and offers some tips for consumers looking
to capitalize on the best of them.

Adrienne Tennant, an analyst at Janney Montgomery
Scott, told the consumer magazine that the steep-yet-temporary markdowns are
essentially loss leaders designed to bring customers in. The hope is that they’ll
buy more full-price items during the visit but many are also designed to drive
multiple visits during a shopping period.

"[Consumers] have traditionally been quite motivated by sales because
we understand that means ‘Here today and gone tomorrow,’" Kit
Yarrow, a professor of psychology and marketing at Golden Gate University in
San Francisco, told SmartMoney.

The article states that retailers shouldn’t mark up sales before applying
the discount because consumers readily figure that out. But it offered three
ways retailers are able to drive traffic yet maintain margins on these deals:

Sales-Cycle Lows: Stores rotate what categories and brands go on sale
each week, leaving other core items at full-price. The extent of each discount
changes over the course of a month, as well.

Limited-Time Deals: Retailers limit the time for when items are on
sale with the hope that a rush of shoppers will also likely buy full-price
offers. Macy’s "one-day sales" offer steeper discounts until 11:00
a.m. and then lesser savings for the rest of the day. The Gap also limits some
of its 40 percent off sales to single days. Prof. Yarrow said this provides
a strong psychological incentive for consumers. He said, "That fear of missing
out is giant in the minds of consumers."

Shipping Charges: At least online, shipping charges can be used to
help offset the deal being offered.

To best capitalize on the deals, SmartMoney advises
consumers to regularly check circulars for promotional patterns, verify the
timing of discounts, check shipping fees, and quickly snap up the good deals.

"If the price is already 50 percent off, take it and take it now," said
Jeff Green, who runs a retail consulting firm.

Discussion Questions: When are loss leaders effective and when are they fairly
ineffective? What other steps ensure stores are not losing margin dollars across
the store?

Please practice The RetailWire Golden Rule when submitting your comments.

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13 Comments on "Winning with Loss Leaders"


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David Biernbaum
Guest
11 years 1 month ago

Loss Leaders are ineffective when one or more of the following happens:
1. A near-by competitor offers even a lower price on the same or very similar products. (Consumers that shop loss leaders are extremely price conscious.)

2. Consumers come to the store only to find that the store is out of stock on the loss leader. This will have a “backfire” affect and turns away consumers from shopping this store.

3. The “deal” on the loss leader is hardly better for the consumer than the everyday low price at Wal-Mart. (All you are doing is calling that to the attention of the consumer!)

Dick Seesel
Guest
11 years 1 month ago

50% off sales have evolved from “once in a blue moon” events to a routine part of most retailers’ promotional arsenal. So the challenge is to use these promotions effectively. Here are some metrics to consider:

1. Do they “traffic” the store?
2. Do they represent a credible value?
3. Can the store successfully “margin out” on 50% off items by sourcing them aggressively with the intention of half-off sales?

The last point is critical: Retailers need to be much more disciplined than in the past about planning and buying 50% off items not as loss-leaders or margin-busters, but as marginally profitable parts of the assortment. It’s a big reason why so many stores have migrated from national brands to private label, in order to drive the “half-off” machine more profitably.

Paula Rosenblum
Guest
11 years 1 month ago

I guess the writer has never heard of the term “cherry pickers.” Those are the people who do exactly what he describes. Some years ago, Best Buy tried to “fire” those customers.

Loss leaders work sometimes; generally I’ve found they generate more overall gross margin dollars in some stores (where the overall basket goes up) than in others. Most retailers look at gross margin by store and know exactly which stores generate aggregate dollars and those where the cherry pickers go.

Do I think retailers should use them? Not if it’s an item they can sell for a profit. I don’t like the practice.

But you know, truth be told, that’s why God made 75% seasonal sell-through. So that the other 25% could be sold at break-even and generate traffic when it otherwise wouldn’t occur.

Ryan Mathews
Guest
11 years 1 month ago

I agree with Paula. There’s obviously nothing wrong with a – sale, but we are increasingly teaching customers how to erode gross margin by cherry picking rather predictable (in too many cases) sales.

If I am an alert shopper I can get away with almost never paying full price and will concentrate only on sale items.

The notion that, as a retailer, I can lure you in with one price and then raise other prices but not to the point you’ll notice may still work for some shoppers but I think the majority of shoppers caught on to the trick many years ago.

Steve Montgomery
Guest
11 years 1 month ago

As I was reading the article the term the came to mind was “cherry pickers” – something I first learned about when studying food retailing in college many years ago. As I was reading the other comments, I noted that Paula was the first to use it.

The question is, does this practice work for a particular retailer? Do some items work better than others? How often should it be used? Does standalone or bundling work best? How do you measure what works?

My concern it that far too many retailers use metrics to measure success that are not comprehensive in nature and therefore really don’t know the impact of their “loss leaders.”

Dan Berthiaume
Guest
Dan Berthiaume
11 years 1 month ago

Loss leaders are probably most effective for convenience store retailers–the customer in a hurry runs in to buy a discounted staple, and while they are there is it very easy (and tempting) to grab a few other high-priced staples and justify the cost against their savings. However, as dollar stores branch more into CPG and grocery items with EDLP pricing, c-stores may find their loss leader strategies losing effectiveness.

Bill Emerson
Guest
Bill Emerson
11 years 1 month ago
These kinds of promotions make sense if, and only if:1. They attract new customers to the store or site (e.g. a new store opening).2. They accelerate the velocity of a discontinued item to make space for a new full-priced merchandise. Beyond these two outcomes, this kind of promotion is effectively a deadly narcotic. Firstly, retailers (particularly publicly held retailers) are constantly striving to grow year-over-year sales volume. When they come up against the artificial jump of these promotions, what do they do? Add another promotion. This trains customers to wait for the promotions, reducing day-to-day sales volume. What do you do to drive sales? Add another promotion, of course. Over time, you end up with daily promotions and ultimately strip out margin and increase relative costs. The only way to protect profits is to reduce expense. Department stores are a perfect example of this. 30 years ago, there were two seasonal clearances and a white sale every year. Margins were fat and service was good. Today, over 80% of their sales are at discount and… Read more »
Ben Sprecher
Guest
Ben Sprecher
11 years 1 month ago
I take issue with the discussion question itself. The question should not be “WHEN are loss leaders effective and when are they fairly ineffective?” It should be “WITH WHOM are loss leaders effective?” As others have mentioned above, some shoppers are cherry pickers, and a loss leader is simply a way to hand these shoppers margin. But, equally troubling for a retailer, loss leaders also hand free money to some of the chain’s primary shoppers who are in the store anyway and who would have bought the product at full price if it hadn’t been marked down. In fact, I see only two groups of shoppers for whom loss leaders end up benefiting the chain: 1) shoppers who are drawn to the store by the loss leader but who buy more while they are there, and 2) whole-store shoppers who have made the store a regular part of their shopping rotation *because* they expect regular deals. Retailers who run loss leaders (or any promotional activity for that matter) should look to their frequent shopper data… Read more »
Ed Rosenbaum
Guest
11 years 1 month ago

I am not a fan of loss leaders and do not believe they drive the traffic retailers want or think they drive. Loss leaders seem to work better in the grocery industry than the traditional retail store, product-driven market.

The main problems I see with them have to do with the inventory level. Too often there are not enough of the items in stock to satisfy more than a half dozen of the early shoppers. That leaves a bad taste in the mind of the consumer who does not often forget when they feel they have been taken advantage of. They have not gone to the store to get a rain check to force them back next week. They have gone to purchase what the retailer advertised they had available and ready to deliver.

Camille P. Schuster, Ph.D.
Guest
11 years 1 month ago

When YOUR customers purchase an item at 50% off, are they in fact filling THEIR basket with more items? Reading that this may happen is one thing, determining whether or not it actually happens with your customers is what really counts. If other companies have a price matching policy and/or your consumers are “cherry pickers,” a 50% sale just costs you money.

Odonna Mathews
Guest
Odonna Mathews
11 years 1 month ago

Being out of stock on loss leaders is a frequent consumer complaint. A retailer’s reputation is damaged when this occurs and consumers are then encouraged to shop elsewhere in the future. Consumers often tell their friends and neighbors about this frustrating experience, thus creating negative word of mouth advertising.

So my advice to retailers is, if you can stock and re-order enough loss leaders to satisfy customer demand, offer a loss leader. If not, stick to a promotion you can deliver on and make money at the same time.

Dennis Serbu
Guest
Dennis Serbu
11 years 1 month ago

Interesting observations. Loss leaders, bogos etc. seem to be the third rail of retailing, and a taboo subject if challenged. I think the practice has lost its effectiveness and only raises suspicion in the minds of the consumer as frequency increases. The second thing that makes my hair stand up is that these low or no margin items are stacked up and featured in prime selling space to encourage more people to empty the profit coffers. If these are indeed designed to be traffic generators, I would suggest directing the traffic to the back of the store.

Richard Gordon
Guest
Richard Gordon
11 years 1 month ago

A loss leader may lend excitement to any store or promotion, however, offering it without promoting it to create traffic is a waste. Why give away margin to shoppers who are already in your store, without the loss leader? However, the more sparingly it is used, the more effective it may be.

A number of chains around the country including Famous Barr, a division of the May Department Store Chain, in St. Louis, MO., practically trained their customers to expect loss leaders in any given week. Consumers reacted over the years by saying that if you wanted something at Famous Barr, wait until it went on sale. I truly believe that over time, the department store chain didn’t know what to do about the situation. If they stopped, their sales figures stagnated. If they continued on, their margins continued to suffer.

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