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The Pros and Cons of Loss Leaders

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Countless Americans lined up outside of retailers in hopes of taking advantage of low prices. But is “Black Friday” really worth it?

The principle behind these sale events is a technique called a loss leader. A store will lower prices on a handful of items, sometimes to a point even below their own cost. The store advertises heavily in hopes of leading people into the store.  Although some products will be sold at a loss, store managers hope that patrons will buy other items out of convenience.

The deep discounts offered on Black Friday are an extreme example of this concept. Retailers may only have a handful of the advertised items in stock but will also advertise other low prices. Often, stores will pull back their opening hours to create additional buzz for the event. For shoppers, beating this system is simple: only buy what you came in the store to purchase.

If you use this technique, you are likely to return home with some incredible holiday deals. But if all shoppers remained diligent and never bought anything that wasn’t advertised in the newspaper circular, the practice of Black Friday would come to an end. Retailers can only afford to sell some inventory at a loss if their customers buy other items where they make a profit.

Not only do retailers hope that merely getting customers into their stores will increase profits, but they sometimes take the extra step of marking up other products in the hopes of maximizing total profit. A Yahoo! Finance article detailed some of those techniques:

Many of the worst deals being offered on Black Friday feature out-of-season products. Prices for home improvement tools and supplies tend to be best around Father’s Day, closer to when many consumers are looking for spring cleaning sales. Both Lowe’s and The Home Depot offer “Spring Black Friday” sales. According to FatWallet’s Brent Shelton, gas grills are a better deal in the fall, when retailers are looking to clear out unsold inventory from the summer months.

Black Friday also coincides with the peak demand for some popular gifts. Among these are toys, winter clothing, and holiday decorations. Shoppers buying toys for their kids may want to wait until December, since prices for toys tend to drop as Christmas approaches. Winter clothing and holiday decorations also tend to be especially expensive around Black Friday.

Customers should also be on the lookout for products that tend to be marked up on Black Friday. Electronics often are loss leaders, meaning companies sell them at a loss to get customers into their stores. However, the accessories that come with many electronics are frequently marked up.

productivity growth on black friday

© Flickr user The Pug Father

Marketing expert Seth Godin said it best: “Cheap is the last refuge of a marketer who is out of ideas.” Reducing prices to below cost as a hope of enticing people into your store assumes they won’t just buy the marked-down items and leave. The loss leader strategy creates a conflict between two essential groups of stakeholders. Management wants more people to come into the store, but customers want the cheapest prices. This tension may drive revenues, but it also creates frustration. A third group of stakeholders is most negatively impacted: store employees.

At AccelaWork, we help people analyze and understand the methodologies they use to make decisions and conduct work. Loss leaders, sales, and price adjustments are just another category of stakeholder analysis. If you want to learn to think and act more clearly at work, contact our Indianapolis consultants. We can help improve the processes you use to serve customers and build success every day.

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