Loss Leaders Drive More Sales & Profits
In today’s episode: We discuss what loss leaders are and how they can help you drive your sales and more importantly your profits!
Here are the Show Notes from the Episode:
**keep in mind that show notes are raw and only highlight what is in the episode. Listen to the show for the full content**
Episode 30 – What Are Loss Leaders and Why Your Small Business Needs Them
The Local Small Business Coach
Let’s dive into today’s topic. – Loss Leaders.
Now, unless you come from a big box retailer, you might be wondering what the heck a lost leader is. Basically, a loss leader is a product or service that you have that you know you will not make any money or at least a very little amount, but you know it is a gateway to additional products or service that will make great add on items or project completers.
For example, a home improvement store will sell drywall around cost but they are hoping you will get the drywall mud, tape and tools which typically has a much higher margin thus more profit.
You see this with the dollar menu at many fast food places. These items are not high margin but they are gateways to frequency and upgrades or add on items.
Each business needs to have a lost leader or two that they can use in a similar fashion.
Your loss leader can do one of the following:
- Drive traffic to your business since you will be the best price the best in town
- Be a Project Starter that you can pile on top of
- Increase frequency of use
Let’s take a look at each and what might work for you and your business.
Driving traffic to your business through a loss leader.
You actually see this in many services businesses. It might be the $9.99 AC Service Check or the $49 three room carpet cleaning service. Think about it, the carpet folks hope you will do the three rooms, be impressed and then be willing to pay for the entire home to be done. They get in the door through the initial $49.
Another example would be the 87c drinks at a gas station. They know that if they can give away these drinks at breakeven or just above breakeven price, you will come and buy chips, candy and other yummies right along with it. Thus increasing their sales and profits.
Project starters are normally found in brick and mortar or product based companies.
We already discussed the drywall example but another example might be when we fall in love with a new sport. A sporting goods store wants to fuel our passion for your hobby. Maybe they sell a starter set of clubs to get you in the door. But they really hope to sell you the balls, the tees, a glove, some shoes and if you really get hooked a host of other gadgets to improve your swing and game.
You have heard me talk about creating add on items in the past to help boost your sales and profits. Add on items are great tools to offset these lost leaders.
Loss leaders can also be used to Increase customer frequency.
I did this in my own business back in the day. Every Tuesday we did $1 kid scoops and $1.50 regular scoops. After you factor in my extra help and other resources to do these days, I was lucky if I broke even. The reason I would do these, is to get folks who normally didn’t eat our ice cream to fall in love and come back at least one or two more times a month at the regular price. So basically, to convert them into new “regular” customers.
Now a word of caution. I have seen folks through the years that get hung up on the fact that these items do not produce enough profit. This short sightedness actually costs them more sales and profits.
Think about it, if the hardware store increased the price of the drywall, they would not be able to be competitive. Sure, they might make more per board but if they don’t have any sales, it didn’t really work now did it? Plus, they kill off the power of the additional items.
I’ve watched folks refuse to participate in these types of lost leaders and then in the same breath moan and grown that their sales aren’t growing. And if they are doing the lost leader, they aren’t leveraging it the right way.
If you only sell them the lost leader and don’t get them to purchase the addition items then you are missing the entire purpose of a lost leader. If someone got out of our store with just the drywall, then we knew exactly why the building materials department’s margin was low.
What good does offering an introductory price do if you never upgrade them?
Hopefully you can see the benefit of having these lost leaders in your business.
So, think about your business and what can you use as a loss leader? Use these 3 categories to brainstorm some possibilities. What is a perfect product or service to use that has the potential to drive more sales? To get your customers to return more often or buy additional items on that visit? If you can tap into this, you will see some great additional sales and profits.
With that, I’ll bring this episode to a close.
So until next time, remember, if you like what we are taking about, then make sure to subscribe to the podcast so you don’t miss an episode, if you love the podcast and what we are talking about, then please leave a 5 star review so other local small business owners know this is a podcast that they can’t miss.
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Meanwhile, I wish you the best in your business and remember: Great Customer Service, coupled with Great business practices will set you on the path to Great Profits!
Bye for now…..
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See you on the next episode!
Two Great Books to Help You With Your Small Business:
Highly Recommend all Local Small Business Owners Read the eMyth by Micheal Gerber. You will learn some critical things about running your business.
The second book is one I wrote based off a popular example I always use when folks are trying to understand their role as a leader with their people. Check it out.