Have you ever heard of the terms “Loss leader”, or “Bait and Switch”?
If you would like to know the down and dirty on these two… or my recent story of seeing the dangers of pulling a “bait and switch” on a “loss leader”… then read on dear reader….
Ok, it seems to little old me that the best place to start would be my definition of these two terms:
“A loss leader or leader is a product sold at a low price (at cost or below cost) to stimulate other profitable sales.”
Ok, I confess, I may or may not have just copied that from Wikipedia… but you get the picture… you take something hot or popular, and you put it at a crazy low price, so people will come to your store etc… and the theory is that they will buy other stuff, or become repeat customers… to cancel out any losses on the “loss leader”.
Bait and switch is simply where you offer one thing, and at the last minute, you pull a switcharoo and change the rules somehow… almost always to the detriment of the customer.
Ok, so that is the learning out of the way… so let’s look at the dangers of what happens if you offer a loss leader, but don’t have the balls, or ethics, to actually follow-through with your promise.
PS: The following is a story that just happened to me:
So my car needed an oil change, and luckily, there is a place nearby that offers “$8.88 oil changes”… in fact, they broadcast this offer via a giant sign on the front of the garage.
Now, I am pretty sure that the cost of the oil, plus the time and resources taken to do this, means that $8.88 for an oil change is very likely in the “loss leader” category… at best, they are breaking even on this.
The theory is likely that an oil change is the popular thing that people need the most, so let’s do that at a super low price, and hopefully, they may need a spare tire or something while they are here, or perhaps they will remember us in future, and become lifetime or longterm customers.
Now, picture this… I walk into the garage, and am in line behind 2 other people…
Person 1: “I am here for the $8.88 oil change special”
Garage guy: “You have an SUV, so it is $28 for an SUV”
* Person 1 walks out disgusted *
Person 2: “I am here for the $8.88 oil change special”
Garage guy: “You have the latest model of engine, we charge $28 for that”
* Person 2 walks out angrily *
Me: “I am here for the $8.88 oil change special”
Garage guy: “Your engine type requires a special type of oil… it will be $28″
Now, my time is valuable, so I just paid the darn $28 and left… but can you see the dangers of turning a loss leader into a bait and switch?
This garage wanted the best of both worlds… they knew that advertising a loss leader price would attract people like moths to a flame.. but they also wanted to make a nice profit, so they pulled a bait and switch.
They may think that this is smart, and that they are getting away with it… but here is what will likely happen now:
Person 1 may go home and tell friends and family to stay away from this garage.. he will also likely never use it again in future.
Person 2 may do the same, he may also tweet angrily about it to his 4,000 friends and followers.
And me… well, I blogged about it, and in future, if ever I need work done on the car… guess where I WON’T be going?
From these 3 bait and switches… all of which happened in just a 5 minute period, they may have made $28 from me… but they have likely lost thousands of dollars in lost future sales… and if you factor in the bad PR and reputation they are causing, it could be much higher than that.
So what is the moral of this story?
Well, firstly, price framing is always an important factor… if you had told me from the start that it was $28, I would have paid it, and wouldn’t have considered that expensive at all… but when I went in expecting to pay a third of that amount, suddenly they framed the price one way, and charged a different way, so the end result is that I am not happy.
Secondly, loss leaders can be a useful marketing tool… but you can’t have your cake and eat it… if you don’t plan to deliver on your promise, then don’t bother offering it in the first place… and if you plan to pull a bait and switch, then please know that longterm, it will have a hugely negative effect on your business.
The story of a loss leader done correctly.
Have you heard of the website Fiverr.com?
In a nutshell, people offer services for just $5.
These range from graphic design, to video work, to novelty gifts and beyond.
Now, I would wager that most of the time, these are loss leaders… however, a year or so ago I hired a kid to do a graphic of me looking like Superman… this was my litmus test to see how good they were at working to a deadline etc…
I paid the $5, and this was the end result….
I went on to hire that person for an entire year, paying many, many thousands of dollars, and even helping him get clients for his business… some of whom paid him $3,000+ for one job.
This is an example of how a loss leader can help grow a business longterm…
In the marketing world, or any role where you give time for money, or are deemed an expert, there is a lot to be said about the harm that de-valuing your time can do on your perceived value… but hey, that is perhaps a discussion for another time.
I hope that some of these two tales have sparked an idea, or perhaps shown you how NOT to do business.
Have a great day.
PS: The garage just called, my 20 min oil change is going to take an extra 3 hours. Remember, first impressions count.