loss-leader

Loss Leader: Leveraging On Controlled Loss To GAain Market Shares

A loss leader consciously loses money on a product item, in order to either enter a market or to attract customers to another segment of the business (ancillary business). Therefore, if well executed, the losses are offset by the gains in selling ancillary products, or in gaining market shares. Thus, it might translate into a long-term advantage.

Glance at loss leadership

A loss leadership strategy can be used either as a go-to-market strategy.

go-to-market-strategy
A go-to-market strategy represents how companies market their new products to reach target customers in a scalable and repeatable way. It starts with how new products/services get developed to how these organizations target potential customers (via sales and marketing models) to enable their value proposition to be delivered to create a competitive advantage.

Or as a way to enhance another part of the business, by attracting customers through a hook product, and having them also shop related products, where the company has higher margins.

Costo and its Food Court Combo as the “Hook Product”

retail-vs-wholesale
In a retail business model, usually, the company has direct access to final customers, which will consume a final version of the product/service, sold in units, and at higher margins. Where in a wholesale business model, instead, a company usually sells raw products in bulk to retailers and middlemen who sell directly to customers. In a hybrid model (like Costco) the wholesaler also sells to final customers.

Costco follows a sort of hybrid model (between retail and wholesale) where it does sell things in bulk, yet it sells them directly to consumers.

costco-business-model
With a substantial part of its business focused on selling merchandise at the low profit-margin, Costco also has about fifty million members that each year guarantee to the company over $2.8 billion in steady income at high-profit margins. Costco uses a single-step distribution strategy to sell its inventory.

How does Costco do that?

With its hybrid model, Costco operates stores near urban areas, yet still in locations where it can host its warehouses. To attract people to its facilities, Costco uses a couple of hooks: low gas prices and its food court.

In short, Costco doesn’t care whether it makes money or not on the Food Court. Instead, the food court has two functions: first, offer a great experience to families that go there, thus creating an opportunity for them to make the trips at Costco. Second, by offering these deals at the food court, customers also leave with the feeling they have received great deals at Costco (a sort of halo effect).

How do you build a loss leader strategy?

The hook product: hooking them up

The first step is about finding a product item that can boost the customer experience, and that will be used as the entry touchpoint with the business. In short, think of the products or services you can offer that while losing money to the business, or perhaps carrying zero profits, will be critical to make the business known, to show its related offerings, and to make the overall customer experience well perceived.

The ancillary model

Once the hook product is in place, think of ways you can complement that with your main product line and service. Thus, creating and leveraging the hook product as the avenue into your main offering. Or to speed up the market adoption of a new product or service.

Let’s see some examples.

Examples

is-amazon-profitable
Amazon is a profitable company. Its operating income and net income passed $12.4 billion and $10 billion respectively in 2018. The operating income was driven primarily by Amazon AWS, contributing $7.29 billion. Amazon has been consistently profitable since 2015 when it posted 596 million in profits.

Over the years, Amazon has been criticized by many analysts for its lack of profitability. However, Amazon consciously gave up profits in the yearly years, so that it could speed up the growth of its e-commerce platform. By offering lower prices, it generated the traction to offer more and more categories (therefore customers could return to Amazon and buy more related items) and to also enhance other parts of its business.

google-business-model
Google is a platform, and a tech media company running an attention-based business model. As of 2020, Alphabet’s Google generated over $182 billion in revenues. Almost $147 billion came from Google Advertising products (Google Search, YouTube Ads, and Network Members sites). They were followed by over $21 billion in other revenues (comprising Google Play, Pixel phones, and YouTube Premium), followed by Google Cloud, which generated over $13 billion in 2020.

Another interesting example in the tech world is Google Cloud, losing money (or at least not being much profitable) on the cloud to win the AI market.

Connected Business Concepts

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.
wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.
marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.
b2b2c-business-model
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.
b2b-vs-b2c
B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.

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