Walking through Ikea today reminded of the Dragons’ Den. This week’s episode touched on the concept of the loss leader, a strategy Ikea executes to perfection.
A loss leader s a product sold at low price – either at a loss or at cost – to stimulate other sales. Classic examples of loss leaders are razors, computer printers and video game consoles. Companies practically give these products away in order to sell other products at a much higher margin, like razor blades, toners and video games. Not only are these products expensive (and highly profitable), but you need to buy them over and over again.
This concept is used in many different businesses. We do it at Admiral Road, to a degree. At craft shows we sell very inexpensive t-shirts. We make a little money on them, but more importantly, they get people stopping by our booth, chatting with us and generally attracting attention. The low-priced shirts give us an opportunity to talk about our other products, like blankets.
Tim Ray and Jonathan Ambeault are the founders of Food Scrooge – a brand new Groupon-type business for food products. They showed up in the Den this week. They’ve partnered with grocery retailers so that when a customer purchases a food deal on the site, they’ll go into a grocery store to pick up their purchase. The grocery store will get a small percent of the Food Scrooge sale – essentially a loss leader for the store. Food Scrooge has been able to sign on retailers in the hopes that customers will pick up additional groceries when they’re in the store. It remains to be seen whether or not this strategy will work in the food biz, but could it work for you? Is there a product or service you can offer at a low cost in order to offer another product or service at a higher profit or to attract new customers?
In the meantime, I bought twice as much and spent double what I intended while I was in Ikea. But gosh, those napkins and picture frames were just darn so cheap!
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