When a loss-leader is a real loser
n December, we
listed several reasons why shirts are a pain. Beginning this
month, we will look at those reasons and try to make some sense
of them.
Shirts are a pain because we view them as
the loss-leader. We think of shirts
as the “dumb thing we gotta do” in order to get the
drycleaning.
Rather than trying to make them
self-sufficient, we accept them for what we think they will
always be: a pain. This just isn’t fair. When we do
bother to analyze the department’s income and expenses,
we usually conclude that the remedy for whatever ails it lies
in either raising prices or cutting expenses
or increasing volume.
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The idea of raising prices is often
quickly jettisoned because of competitive pressures. Expenses
have already obviously been reduced to a minimum because the
department runs short-handed and we steadfastly refuse to add
personnel.
Increasing volume is the path we often
take, only to eventually learn that this either does nothing,
magnifies our problems or causes us to lose more money.
As an additional oddity, how queer is it
that we sometimes reduce the price to get more volume. We
settle on dealing with them as a loss-leader. After all,
that’s how we get that super-lucrative drycleaning.
Well, the fact is that even if drycleaning
is “super-lucrative” (and many would argue that the
jury’s still out on that one), often these profits are
siphoned off by the shirt department. Using a loss-leader is a
dangerous thing for inexperienced businessmen that do not have
a firm grasp on their costs.
Additionally, not all of the drycleaning
pieces that the shirt business will lure have the same cost to
process. If you were sure to get high-margin garments only
— those that are essentially clean, easy to finish and
don’t take much room — then perhaps doing anything
to get those pieces would be worthwhile. It isn’t going
to happen.
Frankly, there is absolutely no reason why
shirts should ever be used as a loss-leader. It doesn’t
really fit the definition.
I have often compared the supermarkets and
their use of the loss-leader with us. It is an ideal basis for
comparison because I think that they invented the loss-leader
philosophy. We, on the other hand, did not. Virtually every
type of retail establishment uses a loss-leader, but it is
important to understand that it may not always be the same
product.
Let’s talk about four different
types of businesses and see how they use the loss-leader. Not
only will we discuss grocery and drycleaning shops, but also
toy stores and convenience stores. That is a decent cross
section of retail establishments.
Convenience stores
Well, their reason for existing is to be
convenient.
They get to charge you too much for a
bunch of things and they hope that you won’t care. They
also give some stuff away, relatively speaking. They’ll
give away gasoline and cigarettes. These are two items that
they have determined enough people “must have.”
Perhaps a logical statement would be to
say that they pray you come into the store and buy a
high-margin item lest they avoid bankruptcy. No, they
don’t. No praying needed. It works and it probably always
will.
Enough customers come in for gasoline and
cigarettes and then proceed to spend money on other items that
have a profit margin. This is indisputable.
Perhaps it is due to the marketing
displays and the store layout. If, at home we suddenly find
ourselves out of sugar or milk or something like that, we have
a couple of choices: go to the supermarket, park the car, walk
50 yards to the front door, log a half-mile among the stocked
shelves, locate the sugar, walk back to the front of the store,
stand in line waiting to check out, PAY A LOW PRICE because
that is what they are good at, walk back to the car, drive
home. Mission accomplished.
Alternately, we can save time and walk a
lot less by simply going to the convenience store. The
trade-off? We may pay 80 to 100 percent more for exactly the
same product.
We knowingly paid much more for the exact
same product, but are fine with that because what we were
interested in buying was convenience and speed. Convenience and
time-saving have a price. That is fine with me. I and millions
of others are completely willing to part with an extra dollar
or two or three as long as we get something for it.
The lesson: The lesson isn’t that
customers are willing to pay more for the same product.
Thinking this is failing to see the big picture. If you can buy
sugar for a dollar or two dollars, which do you buy? It
doesn’t depend on other factors because there are no
other factors. Customers are willing to pay one dollar for the
sugar and another dollar for not having to deal with a parking
lot, long lines and lots of walking.
It is critical that this be clear. A
customer is saying that she or he will pay more for anything,
but what will you do for that extra?
Toy stores
During the holiday shopping season, surely
you noticed that one store would do the seemingly impossible by
offering for sale the toy that they knew everybody wanted for a
near “give-away” price. Why? Duh. A true
loss-leader. The philosophy escapes no one: Everybody wants a
Monopoly game this year. We’ll offer them for $8 instead
of $20. Because it’s the same product, everyone will buy
it from us rather than our competitors.
We are certain that the buyers of the
Monopoly game also need other things. We aren’t sure what
those needs are, but we are pretty sure that we have those
needs in stock. The purpose of the loss-leader was to seduce
you into choosing one store over another. It works because of
two key factors: The product being offered is the same product
and the chance that you purchase other products is very high.
The lesson: If you are in the business of
selling the same product as your competitors and you do not
have the luxury of repeatedly servicing the same customers so
as to establish a personalized relationship with them, you need
to get creative.
How will you convince customers who you
don’t really know all that well that you are the store to
deal with?
Price is almost all they have. Friendly
staff and a clean store help to enhance your experience, but
you probably don’t know that they have that until after
you go there.
Grocery stores
These are a unique breed of retailers
because you can not avoid needing what they have to sell
— so much so that they can offer a myriad of products at
a loss and still only scratch the surface of your needs.
Furthermore, there is a twist that I read about in a book years
ago:
The products that they offer at a reduced
price not only vary greatly, but they are spaced in time far
enough apart that you will need to pay full price for the same
product before it goes on sale again. It is a rather involved
science.
Add all this to the fact that grocery
stores are more in the business of leasing shelf space to major
corporations like Nabisco, Hormel and Coca-Cola than they are
about selling food and we should never try to do what they do.
The lesson: We aren’t them. Unless
you are sure that every customer that comes to your door for
loss-leader shirts will also buy three of four packs of Restora
collar stays from your countertop display, forget about
discounting shirts with the loss-leader mentality. The fact is
that you are actually sure that this will not happen. There are
no similarities among supermarkets and drycleaning shops. You
probably knew that.
These types of retail operations —
supermarkets, convenience stores and toy stores — all
compete for business and the product has little to do with
their ability or desire to compete. They all offer the same
thing as their competitors.
Price is what you compete with when you
have no other tools to fight with. In my opinion, this by
itself makes the use of a loss-leader in the drycleaning
business out of the question. We sell a service, not a product.
This is a key difference.
I’m not even sure if any business
that sells services exclusively ever offers one at a discount.
Doctors, Lawyers, Accountants, Consultants. Am I forgetting
any? It could be, but I think that businesses that sell
services don’t discount one to get the other. I guess
that the service is supposed to sell itself.
Does your shirt service sell itself? Or is
it the same product as the guy down the street?
If you charge less than you should, you
are sending a message to your customers that may be the wrong
one. Are your shirts priced at $1.25 because that is what they
are worth? Or are they priced at $2.50 because that is what
they are worth?
Your customers have the answer.
Shirts won’t be a pain in the neck
if they are a genuine source of revenue.
Donald Desrosiers has been in the
shirt laundering business since 1978 and is a work-flow systems
engineer who provides services to shirt launderers through
Tailwind Shirt Systems, 867 Spencer St., Fall River, MA. He can
be reached by phone at (508) 965-3163 or by e-mail at tailwind1@comcast.net and he has a web sites located at: www.tailwindshirts.com and www.dondesrosiers.com
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