It’s not a secret that we’re all here to make money. There may be plenty of other things we’re here for like passion for our products, customers, vendors, and communities, but at the end of the day, we are here to make a living. To do that, we know that we need to sell the right product at the right price at the right time. We talk about this all the time in inventory planning; it’s the foundation of retail.
Now I’m going to tell you that sometimes you should sell your inventory at or below cost.
It’s not lost on me that this can be a terrible idea because if we do this enough you will literally go broke (really, negative broke). But, if you use this correctly, it can be an amazing marketing strategy for your business.
What is a loss leader?
A “Loss Leader” is a strategy used by retailers that involves selling an item at a low or no markup with the intent of selling additional merchandise at a much better markup. The easiest example is grocery stores: For the most part, they sell their milk and eggs at no markup. Where are they located? In the very back of the store. You have to walk through the entire store and pass all the other things you didn’t plan on getting to get to the basics.
But, you’re not a grocery store. You likely don’t have “basics” like milk and eggs (unless you do, then I’d love to chat about how that works) so what does this look like for an independent retailer? This marketing tool, older than our great-grandparents, can still be incredibly effective for increasing revenue, customer loyalty, and even margins.
There are a few ways you can view loss-leaders and they each serve their own purpose. We’re going to walk through a few of those and hopefully, you’ll be able to put these into practices easily.
Loss Leaders as a Way to Sell Full-Priced Inventory
Of all the ways you can use a loss-leader, the most common way is using your loss leader to find ways to encourage sales of your full-priced merchandise. Ultimately, we’re trying to pair items with little to no margin with items that have enough of a markup to still come out ahead with the two together.
This can be done in a few ways…
Buy X and get Y at 60% off (Buy this top, get this necklace for 60% off)
We’re pairing a high-margin item with the sale of something that can afford to take the hit. This increases our revenue, items per transaction, and gets them out of a “I only buy what’s on sale” mentality.
Buy Y at 50% off which pairs perfectly with X
In this scenario, we’re losing margin on one item but sell something very complimentary (and hopefully, more appealing) at full price. Think really cute tights and a matching sports bra. The bra might be at a discount but the tights are very appealing. The customer is doing the math of the savings they get for the entire outfit, not the single piece.
Loss Leaders as Marketing
Black Friday is, by and large, a bargain shopping day. Your customer paying full-price is not out shopping on that day. By offering steep discounts on particular items, we increase foot traffic to our store or visitors to our site. Ultimately, the goal here is marketing. The common mistake we see among retailers is not making the most of this marketing opportunity. Consider a few things:
How will we increase conversion with this new foot traffic or website traffic?
You can bring all the people to your business but if they aren’t buying it’s not worth it. We need to ensure we have a quick and easy checkout process for online sales and enough staff to take care of customers on these busier days.
To maximize the effects of a loss leader, increasing your general conversion rates through simple things like homepage optimization, customer service training, and ensuring you have a painless checkout process (both online and in-store).
How will we train our staff to effectively sell full-priced inventory?
Once they’re in your store and after those steep discounts, your staff needs to be equipped with the knowledge and skills to upsell your higher margin inventory. Consider running through some role-playing exercises with your team on the ways they can talk about your new arrivals. You’ll be shocked at how talented your team is once they’re given the right training.
This is the time to build your list, aka future sales.
If you aren’t capturing customer data in your brick and mortar sales, you are wasting any lost margin that a promotion might offer. By capturing customer data, we can re-engage them in the future with future discounts, events, and reasons to visit your business. Work with your team to capture basic customer info; at a minimum their name, email, and zip code (so you can target locals!). Hopefully, your POS and eCommerce systems integrate with great tools like Mailchimp!
Loss leaders are almost as old as the idea of retail itself and can be so effective. The important thing here is understanding your business, who your customer is, and what you are setting out to do. If you have a bargain-shopper, using loss-leaders can be huge but if you are generally a high-end business, then it might not be a good fit. As much as I wish these things were one-size-fits-all, these methods are a business by business approach on their effectiveness. As with any promotion, the best thing you can do is make sure you plan the details and maximize both current and future sales.
Josh Orr is a retail consultant with Streamline Retail. Josh and his team focus on helping retailers by implementing the right tools and processes (POS), growing their online business (eCommerce design), and planning for what’s ahead (Inventory Planning), and support all the technology that ties it together. He also loves Houston Mexican food and really wants boot cut jeans to come back in style.
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