Money

How To Draw New Clients Using Loss Leaders

Jim Luff
Posted on August 22, 2014

While giving away free service or discounting service below your operating costs may seem like a bad idea, this long used strategy can help grow your business over time.

Understanding Loss Leaders

Using a “loss leader” is a strategy common to department stores, grocery stores, carpet shampoo services and even air conditioning service companies. You first must understand, the goal is not to give away the store or be a good guy. It is to develop loyalty and get customers to spend money.

For example, let’s say a grocery store runs a sale on a dozen eggs for $1.  There is no way they can make money on the eggs collecting a single dollar. However, placing the eggs in the back of the store makes you walk by many other products — twice. They hope you will buy these other products while seeking out the cheap eggs.

In a more industry related comparison, an air-conditioning service company might offer a so-called summer tune up for $39. Sounds good right? Once they get there, a few things probably will happen. The technician will put a sticker on your thermostat with their company name and number in case your HVAC system should fail you. He also will inspect your system and probably find something that needs attention that will boost the sale price of the home visit. But the most important thing is establishing a relationship with you and getting that sticker on your thermostat. So when your $2,500 compressor fails, who are you going to call? The people who already serviced your system.

Remember, you should limit the number of loss leaders offered. You probably remember Mervyn’s department store and their infamous, “Open! Open! Open!” door-buster campaigns. Those gimmicks eventually bankrupted and shuttered the big chain.

Andrew Armitage, owner of Vintage Chauffeuring in Plainfield, Ill., says operators should make sure they only give away freebies to people who can likely afford and be willing to buy chauffeured services in the future.
Andrew Armitage, owner of Vintage Chauffeuring in Plainfield, Ill., says operators should make sure they only give away freebies to people who can likely afford and be willing to buy chauffeured services in the future.
John Harris, owner of Austin Ultimate Sedans in Austin, Texas, once donated six-hour wine tours to local charities, and no one redeemed them. He got maximum promotion value and exposure — for free.
John Harris, owner of Austin Ultimate Sedans in Austin, Texas, once donated six-hour wine tours to local charities, and no one redeemed them. He got maximum promotion value and exposure — for free.

Related Topics: finance, How To, operating expenses, profits, revenue growth, revenues, saving money

Jim Luff Contributing Editor
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