Peter G (sinetimore) wrote,
Peter G

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Choke It Down

RIIIIIIIIIIIIIING! Okay, class. Eyes up front. Today's lesson is on the concept of "loss leader."

Generally speaking, a loss leader is something you sell that you know damn well you're going to lose money on. Why in the name of Elvis would anyone do that? Loss leaders are actually part of a bigger plan, involving buying other stuff. The idea is people come in specifically for the loss leader and walk out with a bunch of other stuff with profit margins that make up what you are losing on the loss leader and that increases sales and your take.

Now, you see this in all walks of life. Comic books with their special 9 cent issues a few years ago, for example. Many bookstores used the Harry Potter books as loss leaders, marking them down below cost because they knew people like me can't walk into a bookstore without picking up a shitload of other reading material while we're there (the night of Deathly Hallows, I spent ov $80. That wasn't what Book 7 cost). The question becomes, are there enough other sales to make up what you are losing?

Burger King, based in Miami and the #2 fast food chain, created a new promotion, the $1 double cheeseburger. Meatwise, it's actually a smidge bigger than Mickey D's Quarter Pounder With Cheese. They rolled out the promotion and required franchisees, who operate about 90% of BK stores, to go along with it.

Well, the franchisees are fighting back. They are suing on the grounds that the double cheeseburger is too expensive for a $1 menu item. They estimate the cost of the burger itself is 55 cents, with 45 cents for royalties, labor, and so on, bringing the cost of the burger to $1.10. BK twice ran the idea past franchisees, and it was rejected each time as being not cost effective. BK then went, tough rocks, and moved forward with the promotion anyway, forcing franchisees to go along with it.

A mitigating factor not mentioned in the news report is the loss leader angle. The double cheeseburger is not part of a value menu, so, if you want fries and a drink, you are paying full price for those items. The fries, okay, but the fountain drinks are practically a license to print money. I used to be an assistant manager at a pizza parlor, I know how much that costs. This is why, if there were complaints and free drinks would make the customers happy, you did it. (This is also why I balk at movie theaters charging $6 for a soda smaller than a Big Gulp.) I don't know the actual costs for the fries and that, but if you look at the burger as a loss leader, I see where the logic that it isn't a money loser comes into play.

And it's possible this won't last too long anyway. The Breakfast and Burger Shots are going the way of the dodo (last time I had one, they split one sausage patty among four sandwiches. If you want to kill consumer interest, that should do it), so it's possible this will just last for a while and be gone once they have some brand loyalty built up.

So it all comes down to business models -- money up front, or money in association. There ain't no getting rich quick either way.
Tags: important life lessons
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