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June 24, 2009

Loss leaders

As consumers, sometimes we encounter prices that seem too good to be true. We may ask ourselves, How can a store make any money selling at that price? Is the store simply making a mistake?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, certainly mistakes can occur, but sometimes stores purposely price a product to lose money. You might say, well, why would they do that? Well, what they're doing is they're using that product as what we call a loss leader. A loss leader is a product that the store actually loses money on, but it's designed to attract people to come to the store, and therefore, be in the store and spend money on other things where the store's going to make a profit. You see this frequently in supermarkets, where milk or eggs or bread - some of those staples - are put on deep discount sales designed to get folks in there, and then, of course, they'll buy other products. But this happens in many industries. For example, cruises. Many cruise lines actually don't make money on selling tickets to people. What they make money on is just getting the people on the boat, and then having them buy other things, like alcohol, merchandise and meals. So loss leaders are a very important tactic used by businesses designed to attract customers."

Posted by Dave at June 24, 2009 08:00 AM