Selling a product at a loss

[allsetnet.com]

We have read conflicting reports regarding the above.

One article indicates that this method of marketing can produce excellent results in terms of advertising the business, provided that the loss is kept under control.

Another article states that it is better to lose the customer if the sale of your product is not profitable.

[font='Times New Roman']While we do understand that offers resulting in losses can enhance your business. The risks of competing against others, this way, may be too high and if this is the case, both the supplier and the customer may suffer in the long run.[/font]

[Will]

Hello!
 
I used to work for a direct marketing company that made around $10 mil per year selling products to customers at a small front-end loss.   The repeat sales brought them back into the black.  
 
By testing on a small scale first, and having an idea of the marginal net worth or lifetime value of each customer, this marketing approach can be easy and profitable to implement    
 
However, I wouldn't recommend this idea merely to "advertise the business".    If the back end profits can't justify it, then you either need to find a better marketing approach or do as the second article you read said and stop.

[Business Brian]

Good advice - where selling at a loss is most famously used, it is as a "loss leader" at the front of a properly priced range of goods and services. We all almost certainly have seen this in supermarkets - buy one get one free, etc.
 
 Will is quite right, in my opinion, as not doing so simply to advertise a business - there are almost certainly more effective ways to spend money attracting customers - in targetted ways - for example, thus helping to encourage repeat sales and sales of wider product/service ranges.

[Will]

There's an relevant article that discusses this subject (Customer Liftetime Value) at:
 
http://www.marketing-results.com.au/newsletters/Jun04.pdf
 
Bests,
 
Will

[allsetnet.com]

Thanks a lot Will. Very interesting article.

The only problem with this approach is, (as I pointed out in my first post) when your competitors start using this method and make better offers in an attempt to starve you out of customers, and they are bigger than you, well, the result can be disastrous for you and those customers you managed to attract.

[Will]

Hi
 
You make a very good point there...the dynamics of lifetime value can change.   This happened to book and music clubs when the Internet started.   The book and music clubs had become used to very stable returns on their upfront loss.   When internet competitors came in, customers started to just take their cheap upfront offer and run.   So the clubs got into a world of pain.
 
So yes, you do need to track what changes are happening with your lifetime value over time.  
 
But I *can* tell you that it is absolutely standard practice in some industries such as direct marketing / mailorder to make an upfront loss in order to get new clients.
 
You mention competitors making "better offers".   Yes they can do that, but what does that mean?   A lower price?   If you have commoditized your product or service you will be susceptible to price competition, but if your product and service packages are highly differentiated, you're not in so much danger.
 
You can also take the more conservative road of aiming for a break even on the front end.   Any repeat orders are then profitable, but you don't actually have a liability.
 
Also if you're flexible you can scale up or down different campaigns depending on results.  
 
Thanks anyway for looking at the article.   All the best!
 
Will

[rushy]

selling at a loss can be very effective, but you shouldnt sell highly priced goods at a loss if your competitors are larger. you dont want to get into a price war with someone who can outlast you, its simple atrition...you may both sell at a loss but eventually they will outlast you because of their reserves.  like brian said, loss leading is most common in supermarkets...advertise the lower prices on cheap goods to draw in customers and understand teh value of what ELSE they will buy when they enter your supermarket.

 

if youre thinking of doing this tactic for your adsl business i would strongly recomend against it, unless you run a promo month, which you run a loss leading price for an initial two months or something - prove your service is worth keeping, offer your customers an edge, and then you can justify the higher prices charged after the initial two month trial period. AOL are kings of loss leading....2 months free internet access....but theyre sure they can make the money back on the people that take up the offer later, so its a good tactic for them.  loss leading is all about getting people in so that they buy other stuff....
 
good luck with it.  dont try and fight larger companies with low prices though...unlkess youre prepared for the risk and a long siege...
 
rushy

[Business Brian]

Good comments - and welcome to business-talk, rushy.