Special Feature - Retail Pricing

Loss Leading - Look at the Bottom Line

Loss Leading is a common retail strategy employed by most businesses. The basic principle is that a store drops the price on a product to increase foot traffic into the store, hoping that visitors will purchase higher profit products as well as the discounted product.

While the theory is good, in practice it doesn’t always result in a profit increase! Here are some reasons why:

Poor Store Layout: Do you place loss leaders at the front of your store, where everyone can see them? This increases the chance that customers will purchase the loss leader and walk straight to the counter without adding to their purchase. Try advertising your loss leaders, but placing them at the rear of the store, so visitors must walk past (and be tempted by) other higher margin products. This increases the chance of additional purchases.

Not Covering the Discount: If customers are only purchasing your loss leader it takes a large increase in volume to generate the same level of profit. Let’s say you sell Frontline Plus for $60 per packet, and make 30% margin on the product. If you drop your price to $50 you need to DOUBLE the volume to generate the same profit! You could be selling more, but earning less!

Discounting Your Prices
If your present margin is (%)
	20	25	30	35	40	45	50	55	60
And you discount your price by:	Your sales must INCREASE by the amount shown to keep the same Gross Profit.
2	11	9	7	6	5	5	4	4	3
4	25	19	15	13	11	10	9	8	7
6	43	32	25	21	18	15	14	12	11
8	67	47	36	30	25	22	19	17	15
10	100	67	50	40	33	29	25	22	20
12	150	92	67	52	43	36	32	28	25
14	233	127	88	67	54	45	39	34	30
16	400	178	114	84	67	55	47	41	36
18	900	257	150	106	82	67	56	49	43
20	-	400	200	133	100	80	67	57	50
25	-	-	500	250	167	125	100	83	71
30	-	-	-	600	300	200	150	120	100

Increasing Your Prices
If your present margin is (%)
	20	25	30	35	40	45	50	55	60
And you increase your price by:	Your sales could DECREASE by the amount shown before Gross Profit is reduced.
2	9	7	6	5	5	4	4	4	3
4	17	14	12	10	9	8	7	7	6
6	23	19	17	15	13	12	11	10	9
8	29	24	21	19	17	15	14	13	12
10	33	29	25	22	20	18	17	15	14
12	38	32	29	26	23	21	19	18	17
14	41	36	32	29	26	24	22	20	19
16	44	39	35	31	29	26	24	23	21
18	47	42	38	34	31	29	26	25	23
20	50	44	40	36	33	31	29	27	25
25	56	50	45	42	38	36	33	31	29
30	60	55	50	46	43	40	38	35	33

Wrong Product: Products used as loss leaders need to be frequently purchased and well known. The customer must have a need for the product, and must know that it is a bargain!

Unlimited Stock: A clever idea is to run your loss leading promotions on a ‘while stocks last’ basis. This limits the money you can lose, while still generating traffic through your doors. Providing unlimited quantities of your loss leaders means customers can stockpile products at the lower price, meaning you need to make additional sales to make up for future higher margin sales you are missing out on!

Reducing the Value of a Product

Regularly loss leading with the same products is another problem affecting pet retailers. In our industry flea control products and premium dog food are the regular offenders.

The problem this causes is lowering the perceived value of these products, as customers grow to expect the product to be sold for the discounted price.

Just say you use Frontline Plus consistently as a loss leader. The product may retail for $60, but you advertise it at $45 each week to draw people to your store. If you advertise it at the lower price often enough, people will no longer perceive this to be a bargain, but see it as a $45 product.

When the time comes to return the product to its previous price point, customers won’t be willing to spend that much on the product any more. The value of the product has changed in their mind.  Rather than seeing a $60 product on special for $45, they now see a $45 product that you want to sell for $60.

Attracting Valuable Clients

Have you ever wondered why turkeys and hams are discounted at Christmas, but flowers aren’t discounted on Valentines Day? It’s because people that purchase hams and turkeys are likely to purchase other products - they are valuable customers to attract to a store.

People that purchase flowers on Valentines Day aren’t as likely to purchase other products, therefore there is no value in discounting the price to attract buyers to your store.

Consider the products you use as loss leaders. Are they products that are bought by high value customers, who are likely to purchase other items, or are you attracting customers that are price-focused and will only buy the loss leader?