Loss Leaders and A/E/C Marketing

A loss leader is something the seller losses money on, but puts the buyer in a position where he/she will spend more and cover the loss. This tactic is used a great deal in marketing, probably more than you realize.

Let me give you an example. This weekend, my wife and I went to Disney World. She was in Orlando for business and it was her birthday on Saturday. Disney has a policy where you get into Disney World for free on your birthday. This rules applies to anyone. So, my wife decided she wanted to spend her 30th birthday in Disneyworld. I flew down to meet her and we had a great time.

Disney gave my wife a free $80 ticket to the park. But once there, we spent hundreds of dollars that Disney would not have realized but for giving my wife this ticket.

There are other costs, but this gives you an idea at what Disney gained from this approach. By taking a $80 loss up front, they gained over $750 in sales that they would not have realized otherwise. This is a wise marketing effort as far as I see it.

Disney is not the only one who uses this tactic. CDs at stores like Walmart and Target are loss leaders. This is what, in part, put Tower Records and other record stores out of business. Target will advertise a CD for $11.99, which is lower than what they paid the manufacturer for it. CDs are a commodity. Target knows you'll buy it from them at $11.99 rather than from Tower Records at $14.99. Once you are in the store, they are gambling that you will buy other (more profitable) products. Now think about how many times you left Target or Walmart with just a CD. Now ask yourself where the CDs are in the store? That's right, in the back of the store. You will have to pass by a sea of products to get to them. That is the loss leader tactic used well. Professional service firms try not to give out services for free. They see it as a slippery slope. But other industries are using loss leaders to great success. Can this tactic be successfully executed in A/E/C Marketing? What do you think?

Comments (5)

Frank and Mel,

Thanks for reading and commenting on the site!

Great topic Matt - thanks for posting it. I think the pre-positioning work, that time that A/E/C professionals spend with clients helping them sort out the details on an upcoming project ahead of the RFP, is a loss leader concept that gets ...well, lost. It has a tremendous value to clients on both the public and private side of the equation, it's true in this economy more than ever. I interviewed a great client of ours a few years back for an article in our local Daily Journal of Commerce. She said "I don't sit at my desk and dream up projects. I need consultants to help me, especially before I can put a decent RFP together." That "free advice" or those "napkin sketches" have great value on a tactical level (they help solve the problem), but they have an almost priceless value in the real game: relationship building. Loss leader doesn't mean pro-bono and it certainly doesn't mean buying a job. In my experience, in A/E/C, it means giving to get - relationship building 101.

Whatever approach we take to business development, it costs money. So which is the better investment: Wasting the client's time with the traditional sales pitch or serving the client? That free upfront help might be called a loss leader, since it involves doing something we typically charge for. I prefer Charlie Green's term: Samples selling. Whether it's sampling a piece of broasted chicken in the grocery store or test driving that new automobile, samples selling is a powerful force in helping customers make a buying decision.

So rather than telling the client how special we are, show them! This doesn't necessarily mean free work products like cost estimates or concept drawings. More likely it's advice, information, problem solving. It's becoming a trusted advisor. In my experience, serving prospective clients is far more effective than selling them. It's a loss leader that doesn't devalue our services.

Jim,

Thanks for your comment. Great real-world comments like these make this site better!

Loss leaders in the A/E/C industry are far more common than people think. We are all familiar with contractors who bid at a low profit margin, hoping to make it up on later change orders. A number of years ago, I was working for an air pollution controls company that had a fierce rival that we kept going up against. We bid one job as essentially a 2% profit margin job and still lost to this competitor. We finally realized that what they were hoping to do was to drive our price even lower in the hope that we would win the job but go bankrupt trying to perform at such a low price. They wanted us out of "their" market and this was their approach to try to drive us out of business. Once we realized what they were up to, we became much more selective about what projects we wanted to go after and sold our services based on total value and service to the client instead of lowest cost. It's a cutthroat world out there. Once you realize that many commercial buyers buy on "best value" not necessarily "lowest cost", you can differentiate your offering accordingly.

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