A loss leader pricing strategy is one in which a service is sold at a price below cost in order to attract customers who will buy more profitable services. A frequent example of this strategy in automotive repair is the lube-oil-and-filter service. When employing a loss leader strategy – it’s important to evaluate its viability and communicate limits and conditions on the offer. Following are key points on loss leader offerings:
- Consider Customer Average Lifetime Value – Customer lifetime value is the sum of all sales for the duration of a customer relationship divided by the number of customers. This is important to know when considering offering a loss leader. The customer average lifetime value must be enough to justify the customer acquisition cost plus the loss incurred as a result of the loss leader.
- Set Limits on the Offer – The most common practice when employing a loss leader strategy is to specify a limited time for the offer such as one day only. In automotive repair there might also be limits on the vehicles that are eligible for the special price. It might also be specified that the offer is available for new customers only.
- Apply Conditions to Offer – The objective of a loss leader is to establish relationships with new customers. An obvious condition to provide the service is for the customer to provide their email address and cell phone number to be used for marketing purposes. Another condition might be to specify that a safety inspection will be performed while the vehicle is in the shop. The idea is to ensure that there will be an opportunity for future business.
