Loss Leaders

Finding new customers can be difficult and expensive. As you look at your customer acquisition strategy, you may want to consider the classic “Loss Leader” approach. The basic idea is that customers will spend more money on additional items, offsetting losses created by under-pricing the lead item.

The idea behind using a product for promotional purposes is simple. Once a customer buys one thing from you, it costs only one-fifth as much to sell that same customer the next product as it would cost you to get an entirely new customer. That means cutting your customer acquisition costs down to just 20 percent!

To make this work effectively, you have to figure out how you can sell the customer the “next” thing. So one thing to consider would be to find your entry-level product, if you have a large number of different products. When people become your customer, what is the very first thing they buy, the thing that all your customers buy either right away or early on? You might want to consider making this item your loss leader. Then with all your other products, you should have good data showing what percentage of customers buys each product after buying your first product. That should give some indications on how to promote and sell your various products, seeing what customers typically buy first, second, and third from you.

This is a tried and true method for financial models and setting up a customer acquisition strategy. It’s used everywhere from fast food chains with dollar menus to grocery stores with aggressively priced milk coolers. However, be careful with this approach. Some customers who shop with you based on price alone will be quick to jump to your competitor for the same reason. But done right, the loss leader can be an effective way to prime the pump in your business, a measurable form of advertising that gets customers in the door.