Many stores offer special deals on “loss leaders” — products that are sold very cheap, often at a loss, in order to entice customers into the store to buy other things that are substantially marked up in price.
One store that doesn’t do this is Costco. Generally speaking, they try to simply keep low margins on everything that they sell; nothing at a loss, but nothing with a huge margin either.
The “Acquired” podcast did a great episode on Costco recently, and the hosts explained loss leaders this way:
Do you sell loss leaders in the store, loss leaders being when you mark down items below your cost in order to attract people into the store with sales? If you’re those other retailers, yeah, of course, this is a time-honored tactic and retailing. Of course you’re going to use this.
The flip side of doing loss leaders is that you have to make up for it somewhere. You got to markup other goods in the store to fat margins to make it worth doing the loss leader for you. Basically, it means you’re treating your customers like they’re stupid.
That’s exactly my read on this, too. I feel like Acquired number one tenet: treat the audience like they’re smart. If you’re going to ever do loss leaders, you’re violating that tenet and saying like, we’re going to get one over on our customers.
If a store has a widely-advertised loss leader to bring you, you need to question their prices on other products.
That said, Costco actually does have one loss leader — the hot dogs they sell. They’ve famously been $1.50 (with a drink) since Costco opened 42 years ago. In fact, when then-CEO Jim Sinegal stepped down, some questioned if the price of the hot dog would go up. Jim’s famous response? “If you raise the effing hot dog, I will kill you. Figure it out.”
In Costco’s case, the hot dog isn’t hurting them a bit. They might be losing a few dollars with each one that they sell, but how much did you spend in total the last time you shopped there? 🙂
I like the way the Acquired guys ended their quote, essentially giving two options: treat your audience like they’re smart, or try to get one over on them.
It seems like an easy decision to make.
That episode is incredible.
It is also amazing to me that in our copycat culture there aren’t more companies following something similar to the Costco model. Obviously, membership dues give them some flexibility on margins, but the concept of keeping margins consistent across the board (vs. loss leaders and markups) seems like it could be successful even without a membership model.