You’ve seen the ads: ‘Kids Eat Free on Mondays!’ or ‘Half-Priced Oysters on Friday’ or ‘Free Sandwich On Your Birthday!’
But, why would any business knowingly take a loss on an item?
The answer is that the business (hopefully) makes up for the loss in other ways. The birthday guest often comes to a restaurant with other people. Kids usually come with their parents. And, oysters are not very filling so customers often order additional items to make it a meal.
Why Give Things Away?
The strategy is known as using a ‘loss leader.’ As the examples above demonstrate, the strategy involves offering a product or a service that is not profitable but is sold anyway in hopes of recovering the loss through some other means. The promotion may introduce new customers to the brand or it may induce more loyalty to a business. In other cases, it may also result in some publicity.
The bakery chain Au Bon Pain offers a free sandwich or salad with a birthday coupon. The company’s senior vice president of marketing told QSR Magazine that the promotion is designed to build long-term loyalty. To that end, customers must join the Au Bon Pain eClub in order to receive the birthday meal.
So far, it’s been a success for the chain.
“We account for it like other coupon or discount promotions in our promotional budget,” Doyle told the magazine. “Many times [guests] will add another item to thier order — a beverage, snack, or sweet treat. The add-on sales are beneficial.”
The add-on sales are what make the oysters worth-while to the owners of Maison Premier in Brooklyn, N.Y.
In an article in The New York Times, one of the co-owners noted that the restaurant makes no profit from the oysters but they bring in customers who then order a $15 chablis or a cocktail in the $10-$14 range.
What’s The Risk?
The biggest risk to the loss leader strategy is that customers will only buy the loss leader items and nothing else. In the retail and grocery industries, it’s a phenomenon known as ‘cherry picking.’
It’s easy to imagine a customer going to a grocery store and only purchasing, say, the toothpaste that’s on special in the back. Or, perhaps a customer only buys a specially priced turkey from one store and then buys the rest of their Thanksgiving groceries at a discount chain.
For restaurants, it’s hard to imagine a parent bringing their child in and letting the kid eat dinner without ordering something for themselves. Likewise, it would be difficult to go to Maison Premier and only eat oysters without getting something else.
On the flip side, it may be possible to order the birthday special at Au Bon Pain and not buy something else (although the remarks from Doyle suggest that that does not happen often).
Even if it did, Au Bon Pain wants to use the promotion to drive long-term loyalty so ‘cherry picking’ would just be an unpleasant side-effect of the short-term.
The key takeaway is to look for a loss leader strategy that can help your business make more money through add-on purchases while building long term loyalty.
Need help setting up a loyalty program for your restaurant? Contact us today to discuss your options.