The retail sector specifically in the grocery business has witnessed a massive boom in the number of players, large and small, including those individuals with pushcarts who roam around most high-density suburbs. One might then wonder as to the effect of such a trend and what that would entail to a retail business owner other than increased competition. This article seeks to proffer insights as to how one can make use of the loss leader marketing strategy both to improve the turnover rate and the general profitability of the retail business. Among many things, the loss leader marketing strategy tends to lure customers into buying other complimentary items to the one which would be on sale but if improperly executed would lead to unexpected losses.
In an economy where production levels are below the norm goods for use tend to be imported. Consequently, this leads to an ever-increasing number of players in the retail business seeking to equalise an ever-increasing demand and supply curve for goods. Arguably, in the Zimbabwean context, such as the norm where people are being pushed into retail largely because it’s an easy revenue-generating business and can be a good substitute for unemployment provided you have the capital. Secondly, there is an ever-growing demand for basic commodities which over the years have had to be imported from either South Africa or Zambia instead of being locally manufactured.
What Is A Loss Leader
In simple terms, a loss leader is a marketing strategy that makes use of altered product pricing for selected items to stimulate sales for other products. In this strategy, a product is sold at a price below its market cost and this would seem uneconomic for a business. However, this strategy always stimulates sales of more profitable complementary goods and services. It is interesting to note just how grocery stores seem to derive much benefit from this strategy where in some instances they might give out free samples of an item say, sweets, chocolates or mini gifts. As mentioned, the intention behind this is to try and influence the customer’s psychology into buying the product on offer as well as other items before leaving the store.
When to use the Loss leader
At times when the market has a compromised purchasing power, retailers often find themselves with inventory that is not moving. You can’t afford to have locked up capital. This has been synonymous with the covid19 lockdown measures where some retailers had to go for weeks under business closure. Those fortunate enough to stock non-perishables made use of the loss leader concept as soon as restrictions were eased. Most attest that this strategy bailed them out of a dry revenue stream. In this regard, one should appreciate the fact that in the loss leader concept, reasonably cutting down profits of a stuck inventory not only free up the shelf space and reduce inventory but also increases a business`s Cash Flow. While this is so, it is also important to take note of the fact that in the loss leader concept attention to detail and specifics is important particularly in your cash flow. Failure to do so, the loss leader concept might lead you and your business into losing money and you can’t afford that. Also worth noting is the fact that, before you consider reducing your prices, there will be manufacturers who do not want their products to be priced under their minimum advertised price or less than what other dealers are selling them.
Tips To Consider Before Pricing Your Product/Service
The Effect Of Indirect Competition
The use of the loss leader concept varies from whether or not you’re a Business to Business (B2B) or Business to Customer (B2C). In the retail business, you can find yourself occupying both spaces and it thus becomes important to understand how indirect competition will affect your loss leader pricing strategy. One needs to know that the same customers you are trying to lure with your pricing strategy don’t compare products and services in a vacuum, instead, they also compare your product outside your vertical lane. One should thus look at other competing factors which might have a direct impact on the flow of a given business.
Always Begin By Determining Desired Profit Margins
The importance of profit margins spans so far as a business is supposed to be sustainable and you cannot afford to compromise the sustainability of your business all in the name of a business strategy. It thus becomes important to note that it doesn`t matter what customers are willing to pay if margins don’t cover the respective expenses. In that regard, it is important for a business owner to first begin by understanding the costs involved in building, servicing and selling a product/service before determining its actual price.
Setting the actual price varies but usually, your market will always respond to a price you would have set for a product and you should always be wary of this as you set your loss leader. Where prices are too high for a given product, the market might not respond to it favourably. Important is the fact that because the market is not responding to your product therefore you should introduce the loss leader, no. Perhaps you might want to have a look at your source, possibly the suppliers are giving you products at higher prices. If you are in manufacturing, it could be that you need to review the cost of your raw materials.
Being a retailer, to make the most out of any given business strategy it is important to have an appreciation of customer psychology. This is so because customers do not have the slightest of ideas as to what something should cost. It is argued that customers will actually rationalise the preferable price based on clues (anchors) that are immediately available on the spot when making the purchase. Such anchors could be the price of another somewhat similar or complimenting product placed just next to your lead product.
In all the loss leader business sales strategy can work a great deal in stimulating the cash flow to your respective retail business. However, it should be applied with great caution and attention to the overall profitability of your business.