For the first time, I heard about the loss leader strategy in 2014. When I first heard when my colleagues were saying I thought it’s just as a fake attempt to manipulate the sales. But slowly after going through different experiments and observing what’s happening in the current industry trends, it is okay to follow that approach to a limited extent.
According to Wikipedia
A loss leader is a pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services. With this sales promotion/marketing strategy, a “leader” is used as a related term and can mean any popular article, i.e., sold at a normal price.
Let’s go back in see and what happened on one of the experiments in 1904 with a Liquid Ozone Company
This company bought this product for $100,000 having an interest in this germicide business. This is the highest price ever paid for the rights in one country on any scientific discovery. He started to advertise and market this business by approaching different advertisers. It didn’t work out, the company was heavily in debt and it’s balance sheet showed a net worth of some $45,000 less than nothing. On the last day of his fourth year with all losses, he took it as a final chance to contact every advertiser and trying to work with one who could do the Masterpiece that can help this business. He found a person(A) who is named for it.
PersonA was in a good position and do not want to migrate to Chicago for this project. He was offered no salary but with a one-fourth interest in this almost bran After a lot of convincing, PersonA agreed and started working on this project.
After a lot of research and thoughts through his previous experience. He held to his old conceptions
“Serve better than others, offer more than others and you are pretty sure to win”
“I have the winning idea. Let us buy the first .50 cent bottle. Then, to all who accept this, let us offer a guarantee on six dollar bottle battles. We pay for the first bottle (because it’s free for users). If that test leads one to continue, we take the risk on the rest”
#GrowthHack1 (Full Loss Leader Strategy on first order free)
With addition to this, the PersonA suggested
- To each who inquired a free bottle with additional offering “Five dollar bottle instead of six dollars (Meaning $1 dollar discount)”
- “If the results of this five bottles proved unsatisfactory, every penny would be returned to users”
#Growthhack2 (Minimal Loss leader strategy on second order)
In a nutshell, one bottle for free. The rest with discount and warranty.
They tested this idea with a few cities. These test cities provided these results
Each free bottle cost (can say COGS) = $0.18
Cost per sale per customer = 90 ( There is no clear explanation of how many items sold until now. But logically the cost per sale her has calculated based on >
Claims under the guaranty sales are less than 2 percent.
Total Sales — Cost of all free bottle — Discount Cost on the five bottles — claims on return = Cost per sale
After seeing the result With first few test cities, they rolled out all other cities.
Now with another strategic move
PersonA sends these results to other leading druggists, one in each city. With each letter, there is a contract that specified the advertising the druggist need to do in their own cost. Why? So you do this advertisement, when people send the coupon from each region for this free bottle, we will direct them to your store. So even though the first bottle you facilitate to provide (and Liquozone company own that cost of a free bottle), the subsequent purchase will benefit the druggist and he will be the monopoly on that city.
#GrowthHack 3: (Partnership with mutual benefits, Save delivery cost as druggist can help the logistics for the users on nearby location)
Smartness again >Attribution on 1904 & Data-Driven Approach.
If you see the below ads, you will find a number “506, 56, M3–5”. So when a user wants to cut the coupon and send to the company, they clearly know
- Which advertiser/publisher has advertised this
- Which city it comes
They won in this Experiment. They received in the next year over 1,500,000 requests for the free bottle. In one year the net profits were $1,800,000. They expand to Europe from Chicago. In two years, they served nearly every country in the world. Advertising in seventeen languages.
I believe now you can connect back the story to what’s happening with on-demand companies offering you a free meal voucher for first, then subsequent discounts on further purchases. The payment apps make you addicted to these strategies. Some go to the extreme, some play to calculated risks. The calculated riskers use the first few tests to see the result and then go on to the scale. If the first few tests fail, figure out first before we scale.
The personA name is Claud Hopkins, Famous advertiser and Marketer in 19th century. This lesson is taken from his book “My Life in Advertising” and converted according to current nature
Here is the advertisement used at that time.
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