I’m Alex Berman and you’re watching SELLING
BREAKDOWNS.
Although there are many different industries
and services and products, there is one thing
that ties all businesses together; you sell
your product for more than it costs, right?
Well, not always.
Today we’re going to look at the idea of
loss leaders, where retailers sell some items
at a loss in order to attract customers.
We’ll use Walmart as our main example but
we’ll look at a few others too.
Let’s start with some recent news.
In case you hadn’t heard, Amazon recently
bought Whole Foods and their first act, practically
on day one, was to slash prices.
It seems strange, doesn’t it?
Whole Foods is a really strong brand, famous
for it’s high quality produce.
Why not just use the existing Amazon distribution
structure to help it expand?
Well Amazon know that the reason they are
so dominant online is that they operate at
very fine margins, and Walmart are not that
much different.
So, if you want to compete in the grocery
business, you have to go cheap; seriously
cheap.
Even if you forget about coupons, it’s possible
to buy a basket of something in Walmart where
the store would be making zero profit or even
a loss on every single item.
The most common are dairy products like milk
and eggs.
A gallon of milk might sell for four bucks
but it could cost them $6 from the supplier.
Eggs typically sell for a 10% loss or more.
It’s true for many other household items
like toilet paper, health and beauty products,
some frozen goods.
But the whole point of a supermarket is that
you don’t go in there just to buy two items,
you’re there for the price AND the convenience,
so you’ll do all your shopping in one place.
And if you know that the groceries you always
need, such as milk and eggs, are cheaper in
Walmart than any other store, that will be
where you shop.
You’re not going to pick up the eggs and
milk, checkout, and then drive to the next
store with the cheapest chicken, then the
next store with the best price on beer.
No, they hook you in with your regular items
and know that they’ll turn a profit on the
other things in your basket.
It’s their enormous size that allows them
to have so many of these loss leaders; they
simply have the revenue to walk these margins,
knowing that all they need to do is keep getting
people through the doors and enough customers
will buy big profit margin items, to cover
for the super savers.
The model of the groceries business is what
a lot of businesses want; loyal customers
making regular purchases because volume is
what makes you the real money, most of the
time.
Better to have a million customers making
you $1 profit, than one customer making you
$1 million, because you can’t rely on just
one customer and it might be hard to find
another.
But, if you can sell to a million people,
why not 2 million, 3,4 and on and on.
So, when Gillette sell you a razor, they don’t
need to make any money on the handle, which
is expensive to produce; you can have that
for free for all they care.
But once you have the handle, you’re locked
into buying Gillette blades for months or
years, and the blades are cheap to make.
Even with a big tv, which has no real consumables
that go with it, it’s actually more likely
they’re making money on the cables and the
remote because if you just spent $600 on a
TV, they know you’ll think “okay, it’s
just an extra $50 for some add ons”
Your business might not be able to sell at
a loss, you need big financial muscle to play
this game.
But, it’s worth looking at exactly where
you make the most money and make sure you’re
doing everything to funnel more business in
that direction.
This could be lowering your price on a popular
product if you know it will make it easier
to upsell the really profitable add-ons.
Or how about providing additional services
that may not bring in revenue but could boost
sales of your big ticket item.
Wanna learn more about business theory and
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