Good business strategy? The concept of loss leading and how it can work for you

I’ll leave the decision on this to your own conscience 

My main two parcel delivery services of choice are Royal Mail and My Hermes and so I tend to alternate between the two, depending on the size and weight of my parcels. So, earlier this week, with multi-tasking in mind, as I was on my way to drop my eldest daughter off for a school trip some 35 miles away, I ended up in a post office, which was not my usual haunt, to dispatch quite a large quantity of parcels. Whilst I was there I got chatting with the member of staff who was serving me.

The conversation soon turned to eBay, basically because it was pretty obvious that my parcels contained items that I had sold on the site, and she was enlightening me about a number of other eBayer’s that regularly used this particular post office. I’m really not sure that she should have been divulging some of the information she gave away, but seriously, I could have stood there for fifteen minutes and come away with ideas for about six different hot products!

Anyway, by the time she had finished explaining that Mr X sold this and Miss Y sold that, not to mention Mrs Z who is apparently doing a roaring trade in the other, she took a long overdue breath and then said:

“Well of course I don’t know how they all do it. There must be a knack to it, probably some special way of advertising things because you know, I’ve tried it myself and I can’t seem to sell anything and actually make a profit …”

Of course, I bit my tongue and resisted explaining that yes, of course there’s a knack to it – you can’t just throw a three keyword title and two liner description of a product up on eBay and expect to achieve a decent sale. You can’t just expect any old item to sell. There are important things involved – like research into the product, like research into the relevant keywords, like learning the skills to write a compelling description…

In fact, even if I’d wanted to explain, I wouldn’t have had a chance because before I could even nod and offer a few words of sympathy, she was off again…

“And another thing, now here’s a question for you…how do those people sell things for £1.99 with free postage? I mean, obviously I work here and I know that a large letter sent by second class post is £1.19 if it’s around 200 grams – so how does that work when the postage costs almost as much as the actual thing they are selling in the first place…and what’s the point?”

I wasn’t entirely sure if she was really asking a question at this point, or just talking at me, so as we appeared to be nearing the completion of my transaction, I simply shrugged my shoulders and made a kind of ‘I don’t really know face’ to avoid being detained further.

So, this week’s eletter is for you, Miss ‘pleasant but quite talkative’ post office employee. If you’re out there and reading this, here is the long answer to your question, from the safety of my own office…

Very low priced products sold by established eBay sellers with large inventories are often simply ‘loss leaders’. In other words, a product sold at a loss to attract customers.

Mostly, a loss leading product works by encouraging traffic, excitement, bids and higher value sales. To explain in basic terms, here’s an example:

Let’s say that as a seller I have three related products – for example, a digital camera, a camera case and a mini tripod. For arguments sake and to make things really simple, lets say that each of these items costs me £20 to buy – a total of £60. So, I then price each product accordingly using the camera as a loss leader. So I price it at a ridiculously low £15 (a loss of £5) but then set the price of the camera case to £30 and the mini tripod to £30 (giving a profit of £10 on each).

So, here’s the scene. You, as a buyer, are looking for a digital camera and spot the one I’m selling in my eBay shop. After some research you discover that my price is extremely competitive – in fact you can’t find it anywhere else cheaper and so you decide to purchase. You then see that I sell a matching case, which is pretty much essential for protecting your new camera, and also what looks like the ideal tripod – perfect for those tricky shots…

It’s very likely that if I draw you into my eBay shop with the offer of that £15 camera, then show you a matching camera case and tripod you will be tempted to purchase one or the other, or both…

As a buyer, you will already be thinking (sub-consciously) that these ‘extras’ are also being offered at competitive prices, because after all, the camera is a good deal, so what’s the point in looking anywhere else, plus you’ve ‘saved’ so much on the camera, you can afford these other items, and you may as well purchase the whole lot in one go – and probably get a discount on the postage too.

So, the loss leading camera sells for £15, the case for £30 and the tripod for £30. A total of £75. My profit is £15 on the three items – and they can all be dispatched to you in the same parcel saving me on postage costs.

I’m happy because I’ve made a profit, you’re happy because you feel like you have got a good deal.

But is this good business?

Many established online sellers use this method – as do many high street shops and supermarkets, so it’s not illegal or fraudulent, however, it’s not all straight-forward because there is a case for loss leading being seen as a type of ‘deception’ and so it really depends on you and your conscience.

The strategy I’ve described above would be the typical way a loss leader could be utilized, but there are other ways too which may sit better with you and your business.

For example, you could list a single item on eBay at a really low Buy It Now price (or even at auction) to encourage page views and link to or reference your other products or your eBay shop from within that listing to encourage click throughs to your shop and other items.

Or you could list multiple quantities of a product on an eBay Buy It Now as a loss leader and when you dispatch those orders, include a note in the package directing your customers to your own website where they can see and purchase a wider range of related products – this is a great marketing strategy and will save you on eBay fees for repeat purchases.

If you decide that this is a strategy you’d like to try, there are some simple rules to follow:

  1. Make sure your loss leader is an in demand product.
  2. Potential buyers will look for ‘bargains’ so make sure your loss leader is a decent ‘higher priced’ product offered at a huge discount.
  3. Make it easy for customers to click directly through to your store from your loss leader listing.
  4. Suggest other relevant products that complement the product from within your loss leader listing description.

So are there any cons?

Well, apart from the potential ‘deception on your conscience’ one, there are a couple…

  • There’s always the chance that if you drop the price on a very popular item – one that your competitors are also selling – you may be the instigator of a price war, and the value of the product will simply get driven lower and lower and lower.
  • Someone may purchase your loss leader and not be tempted by the ‘extras’, therefore making you a loss, not a profit.
  • If you use an auction format and start bids at 99p you may achieve nowhere near the potential selling price of a product, even if it’s a loss leader. This is why it’s vital that the product is in demand and popular.

In my opinion, the pros do outweigh the cons. After all, this is business and who’s going to turn down more traffic, more sales and potentially more profit?

So, I’ll leave the decision to you and your conscience – and I’d like to say thank you to Miss ‘pleasant but quite talkative’ post office employee for providing me with this weeks eletter topic. I hope you enjoyed my answer!

As always I wish you the best of success,

Amanda

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