Loss Leader Marketing and Advertising: Business Owners Need to Keep and Open Mind

The concept of a loss leader is a fairly simple one. You advertise and sell a product at a loss in the calculated hope that a customer will purchase other items in addition to that one item for an eventual profit. For Example: the local grocery store purchases Cheerios cereal for $2.00 a box. The normal sale price is $4.00. The grocery store then advertises and sells the Cheerios as a special for $1.75 a box (a .25cent per box loss). The grocery store has calculated that the average person that enters the grocery store will spend $30.00 at an $8.00 per person profit. The end result of the loss leader $1.75 box of Cheerios is more traffic through the store and a profit.

I recently spoke to an ex-employee of a large home improvement chain. This store would advertise a product (Thompsons Water Seal for example) at a loss, then position a customer service representative in the aisle. When customers would go to purchase the can of Thompsons Water Seal, the store representative would re-direct them to the store brand of water seal, which was priced lower than the popular Thompson brand. The store brand actually cost the store less to purchase and had a greater profit margin.

This approach involves strategy. I feel it walks a very fine business ethics line. However, it is still a very well thought out strategy. There can always be a calculated risk when it comes to advertising and marketing. In the long run, if you track the numbers from a strategy, they will tell you which promotions work effectively and which ones may need some tweaking. For some reason, I find that these very sound practices don’t occur often enough in the in-home contracting industry.

Where’s the Strategy?

Let’s look at a real example from the residential heating and air-conditioning industry. Heating and air-conditioning systems need routine maintenance the same way that a car requires maintenance. That one maintenance of a homeowner’s gas furnace (for example) usually goes for around $149.00. That’s what it takes to get a fully trained technician into a house in the time needed to complete a maintenance. These maintenances are usually done prior to the start of a heating season when the companies struggle to keep their technicians busy. Lack of marketing these maintenances properly is a common issue with contractors. Marketing and advertising in general is a huge issue with most small to mid-size contractors (but that’s another article for another time).

Way too much time and effort is spent by contractor business owners agonizing over how long it took the technician to complete the maintenance and the fact that they probably lost money doing it. The technicians spend all the time in the basement looking at the furnace and very little time with the consumer. No one wins in that scenario.

As I mentioned already, marketing strategy is a key fundamental that’s missing in the residential contracting world. Understanding how to use your service technicians as a marketing tool is an even bigger one.

Here are the Fundamentals

Here is a checklist of some key fundamentals when it comes to loss leader marketing of maintenance calls.

1. Market your maintenance for under $100 dollars. Somewhere in the $59 to $89 range is found to be most effective.
2. Have a structured system in place that helps your service technician properly educate a homeowner on the condition of their equipment.
3. Have a spiff program in place that will reward your service technicians for successful equipment lead generation to the sales department. Proper training, an evaluation form and ethics will ensure your service technicians have the customers best interest in mind.
4. Keep your focus on gaining customers and the future benefits of that.

Remember, your goal in all of this is not to sell $1.75 boxes of Cheerios. It’s to walk away with the $30 per customer sale and the $8.00 per person profit. Don’t be afraid of the loss leader business owners, embrace it!