Loss Leader Marketing: How Can Your Business Profit More by Losing MoneyLoss Leader Marketing: How Can Your Business Profit More by Losing Money
Recently I had a conversation with business FB group founder, asking me about the best strategies for businesses to market online. Conversation spiraled and we quickly agreed that the most successful strategies are the simplest, easily recognized, and has the greatest positive impact on lifetime client value. Of all the strategies we discussed, loss leader marketing is something we can’t ignore.
A loss leader is a strategy where products or services are offered at a loss, to lead people to buy more profitable products or services. One of my very first marketing clients was a spa, and while we tried all different methods to attract clients online and offline, the one thing that worked best, incurring 70% increase in sales, is ramping up its existing client referral. We maximized it by doing online and in-store promos and training the team to upsell well.
Be prepared to lose some to gain some
With most types of effective marketing, you must lose money first.
Loss leaders can start from a free toothbrush to a free dinner in a restaurant. If you’re going to pick a place to shop, you might prefer the one with Wi-Fi. VP of AT&T Inc., Michael Colaneri, shares that retailers that deployed loss leader pricing strategies to drive store traffic now must creatively deploy unique attractions.
“Anything that can interest or draw consumers into a store is sought after with near fascination.” writes Colaneri, suggesting to upgrade the shopping experience by employing Wi-Fi and digital signage as loss leaders.
Often, this does not make sense to business owners who fail to see how one could be making money by giving out freebies.
Take for instance the moment when you sit down at a bar. Ever wonder why one of the first things you’re given is a free bowl of peanuts? Those little treats are given for a reason – they make you thirsty. And then you buy beer.
This strategy is often misunderstood by businesses as what they see is the immediate loss (e.g. cost of peanuts). That’s what makes loss leader fascinating. After all, it’s all about psychology – you must lose a fly to catch a trout.
Scaling businesses with loss leaders
I often hear local businesses commenting that “successful marketing should bring at least twice the money back in a span of days,” but that’s not very correct.
True, any business that allows some good amount of budget for their marketing spend should expect some positive returns. This is not, however, the case, especially when the marketing goals are equated with a dollar value in a certain period of time. When I used to manage social media for a Clinique counter before I had my business, they often gave out the free lipsticks or mascara, upselling clients to something else when they came in. Each marketing campaign takes time to show a dent on your financials.
Successful marketing is focusing on getting you quality clients, fast, in hope that you can turn the loss into a long-term win. Even McDonalds gives away free small premium roast McCafé coffees on certain times and days to lure breakfast eaters at its doorsteps. Loss leaders are everywhere, influencing people’s buying decisions without you noticing it.
It’s often the fastest way to scale your business if you are really ready for it.
Understand your loss leader’s sustainability
Today, I saw an unexpected example of loss leader marketing – Google Search Ads. And no, I’m not being ironic.
One of my new clients is a cleaning company, and on a call with a Google Manager today he told me he wouldn’t touch anything about my ads. Without doubling the budget, he said, I would not see many changes and even then, it might not be worth it.
Let me bring down the numbers. Math’s not my strongest subject, but we need it for demonstration purposes.
1. Cost per click in cleaning industry for the first ad on the page is near $10 per click.
2. Google Manager would offer to manage your own ads if you are in cleaning when you spend $70+ per day.
3. WHEN Google manages your ads, they say sometimes conversion rate (people who actually book the service after the click) reaches 7% while normal conversion rate is about 3%. So, if you are at 3% or more you are doing a great job.
This is when I realized that all the cleaning companies who market on Google use loss leader marketing to get clients because there is no way you could be “making money” with this:
Industry conversion rate:
• 100 clicks X 3% conversion rate = 3 clicks would convert;
• Cost of getting 100 clicks = $1000
• Immediate value of the 3 bookings at most 3X200=$600
That is a loss of $400 and I did not even deduct the cost of the service to the provider.
Another calculation, if the ads are managed by a kickass Google Manager and you actually got 7% conversions:
• 100 clicks X 7% conversion rate=7 clicks would convert;
• Cost of getting 100 clicks=$1000
• Immediate value of the 7 bookings at most 7X200=$1400
Again, you most likely still lose money because you won’t necessarily get an average $200 cleaning and you need to pay your employees.
Basically, to earn money you want those customers who booked to come back, so you want to do an awesome job at keeping them at this cost. Good news: most people don’t clean once in a lifetime and most cleaning companies don’t awe with their service, so there are endless opportunities. Just make sure to study first whether your loss leader is sustainable and will turn a profit.
In summary: if you are in business, you are probably one of the two:
• A business owner who believes in investing in your business to get it to where they want it to be, trusting that when you got the client, she/he most likely will stay.
• Or a business owner who believes that they should earn the money before they invest it.
Whoever you are, pay close attention to your existing and previous customers. Maybe the big problem is not getting more leads.