Other Benefits Of (And Approaches To) A Loss Leader Strategy
The "loss leader" concept is generally well understood:
A loss leader (also leader) is a pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services.
The idea is pretty simple. The retailer sells certain products below cost to get people into the store in the hopes that they will also buy other, more profitable, items. Characteristics of loss leaders include...
- Often placed in an inconvenient part of the store, like the back corner (as far away from the entrance as possible) so that buyers must walk past all other higher profit items.
- Usually a product that is frequently purchased, assuring that buyers realize they are paying a discounted price. The strategy can't bring in buyers unless they are aware of the price and consider it a bargain.
- Stockpiling is always something the retailer wants to discourage so loss leaders are often perishable (milk, eggs, etc.). Retailers may also use scarcity, or impose purchase limits, to prevent customers from stockpiling these products.
This works great for a supermarket that offers thousands of products. A customer might need to stop for just milk or eggs but quickly succumb and buy many more profitable items like prepared food.
It's a much harder for a florist, where each customer is only likely to order one or (if you include delivery) two products. If for example delivery is sold at a loss then the flowers have to be sold at a much higher price, high enough to likely offset the appeal of the discounted delivery. There just aren't enough items in the typical flower order to cover the missed profits.
But a loss leader strategy can serve another purpose from a pricing perspective. Ikea, who sells hot dogs at an extraordinarily low price, is a great example.
Is it likely for Ikea to expect that diners would come for cheap hot dogs, but spontaneously pick up some furniture along the way? Possible, but not likely.
Instead the low prices on hot dogs serve to reinforce the idea that the furniture must also be a good deal. If this company is selling hot dogs at such a low prices, almost certainly lower than you could get them anywhere else, then their furniture prices must be very low too, right? The bargain hot dogs are there to convince you that everything must be a bargain.
Still not a really easy thing for florists to pull off, but most florists don't want to be seen as the cheapest. Competing with deceptive order-gatherers, big box stores and bucket shops to be the least expensive is a race to the bottom that most florists want to avoid.
Fortunately, the same principle can be turned around to imply quality instead of value.
Several years ago there was a trend in major cities that saw upscale restaurants competing to offer the most expensive hamburger. Before this these restaurants would never have offered a burger, but they quickly realized the benefit of offering very expensive burgers with Kobe or Wagyu beef, truffles, foie gras, etc.
Just as cheap hot dogs are used to suggest that Ikea furniture must be a good value, outrageously expensive hamburgers suggest that a restaurant is high quality. If a restaurant can charge $30 for a hamburger it must be outstanding, right?
This, a kind of anchoring, is a strategy that many successful upscale florists (and other luxury retailers) employ very effectively. Showcasing a few very expensive items establishes credibility as a quality brand, and increases demand for other less expensive (but still very profitable) items.