Is That Truly a Loss Leader or Are You Just Taking a Loss?

October 9, 2020 in Retail

Is That Truly a Loss Leader or Are You Just Taking a Loss?

You know how this goes. One day in the spring some c-store drops a pallet of mulch outside the store, priced below Home Depot. The word goes out that this is driving traffic to the store boosting sales of all kinds of profitable items. Next thing you know, mulch piles decorate every C-Store in the area until they are finally dumped in November. This is management by rumor. It happens all the time when no one can check whether the “special” actually worked. A few weeks ago I talked to an operator who had been selling his most popular bottled water at a loss for $1.00 (This wasn’t the stuff from the Swiss Alps). He had been using it as a “loss leader” to draw customers into the store, who in turn would spend money on other, more profitable products. But then he went to a conference and learned from a larger chain owner who had just started using Business Intelligence to analyze their promotions, that this approach was completely ineffective. So, he decided to raise the price by 60 cents. One year later, he had generated over $100k additional profit without any impact on store sales or customer visits.

This operator wanted to believe that he had become a smarter marketer, but he knew he had no more reason to believe the second rumor than the first. Peter Drucker, perhaps the most famous management guru in the world, once said: “You can’t manage what you can’t measure.” C-store operators need to be able to measure the success of their specials and promotions so they can sift the good from the bad and ignore the rumors entirely.

Halloween Candy Sales

Here comes Halloween. One chain says the best way to capitalize on Halloween candy sales is to run a big discount program, drawing a lot of new buyers into the store. Other chains bet they will make lots of money by pricing Halloween candy at full list price, thinking the buyers have to shop whether they like it or not. Then as Halloween approaches, a nearby grocery store may start their day-after-Halloween discount a few days early causing your sales to decline. After Halloween there’s the race to the bottom as everyone steeply discounts to move their remaining inventory.

This year the situation has been made even more complicated because of Covid. I recently read an article saying Halloween candy sales are up 20% in early September. Time to double your inventory! The article also mentioned that retailers have, in this Covid year, put their Halloween displays out early, which might explain the 20% growth early in the season. Anyone thinking for more than a minute can see that the number of Halloween trick-or-treaters will be down this year because of Covid. So what are the sales of Halloween candy going to be this year? Will parents buy the big chocolate bars and keep their kids at home, foregoing all the rest of the candy? Will the suburbs act differently than the inner cities? Who can say what’s going to happen? No one. C-store operators need to be able to adjust their strategies on the fly once they find out what the trends are. But how can they adjust unless they have real-time data on what is moving in each store location?

Use Business Intelligence to find the winning price strategy

With Taiga’s StoreKeep, operators can see in real time what is moving and what is wasting shelf space. They can associate knock-on sales to promotions, measuring the impact of price discounts. They can test three different promotions in three locations to find out which ones are working – in time to make adjustments. You don’t have to know what this peculiar Covid Halloween will do to consumer tendencies – you can test and react.

Measuring Lift is Critical – A “loss leader” is a promotion that’s driven by steeply discounting one product, expecting hordes of buyers to buy other, high margin products after the initial discounted sale. The “Lift” is the effect that the discounted price has on the sales of the other products that fall in the same “basket”. In order to properly measure Lift, you need to compare the results of the promotion with the performance of the same product mix before the steep discount. Lift is difficult to determine unless you have real-time visibility into your POS transaction data, possibly from multiple stores with differing promotions in effect. You can’t wait for end of the month accounting reports to determine which strategies are most effective (and which strategies are dead losses).

The Bottom Line

If you are running your promotions based on strategies rumored to be effective, while your competitors are learning the truth by measuring actual sales results, then adjusting their strategies to reality, you are gambling against the house.

Until Taiga’s StoreKeep became available, strategic planning by rumor was the only game in town because only the large c-store chains could afford to capture data for strategic analysis. But now StoreKeep makes real-time data analysis affordable for even small chains of stores. There is no longer any excuse for guessing which promotions work, and which ones are dead losses.