A Lost Can Make You Money… Just Ask Costco!

A lost leader, by definition, is something that is sold at a loss to generate profit on something else.  Costco found the ideal lost leader.

There’s a reason Costco has kept the price of its hot dog and soda combo intact for roughly 40 years. The company is willing to forgo profits and even lose some money selling the combo for $1.50 to offer great value to customers and retain memberships.  Last year, Costco sold more than 130 million hot dog and soda combos totaling about $195 million in revenue for the company. But all told, it didn’t profit from those combos.  That’s okay, though.

See, the reason Costco can take a loss on its hot dog and soda combo, and the reason the chain is able to offer such competitive prices in general is that it generates a ton of revenue from membership fees.  During its last fiscal quarter, Costco reported membership fee income of $1.11 billion, up $84 million or 8.2% year over year. Given that, losing some money on hot dogs isn’t such a big deal. The moment the customer walks through the front door and sees that Hot Dog/Drink combo for $1.50 they instantly think “There is value at this store!”.

So how does that apply to the trades industry?  The point is to think outside the box.  What can you offer that no other company in town offers?  What can you provide customers with that will build loyalty and create short and long-term sales…even if it costs you some money upfront.  

A potential customer’s furnace, air conditioner, or heat pump goes out.  Ouch!  Obviously, that is a major problem if you are the customer, especially if it’s really hot or really cold outside.  Under ideal conditions, the needed equipment is in stock and the same day the unit fails the contractor can install a new one.  That’s the perfect scenario.  However, what happens if the unit is not in stock, or the installation team is backed up for a day or two?  Then what?  Chances are the potential customer is going to call around looking for someone who can install a unit that day.  What’s the sale worth to you? 

Some companies have found the answer.  Some keep spare AC units around and offer to install a used unit temporarily while waiting for the installation crew to catch up or for equipment to arrive.  Others offer a free night or two at a local hotel (work out discounts with the hotel ahead of time).  How many new customers would you generate if these options became standard company policy, and became part of the overall marketing program? 

Maintenance agreements can be another great lost leader.  The real benefit of a maintenance agreement, from the company’s standpoint, is to develop a long-term relationship with the customer.  Maintaining their equipment once or twice a year builds relationships.  When repairs are needed, or equipment needs to be replaced, who are they going to call?  Chances are it will be the same company that has routinely been maintaining their equipment for years.

Maintenance agreements are the trades contractors’ hot dogs and drinks.  Perhaps you can offer them at a discount or accumulate a portion of the cost of the agreement towards future repairs and/or equipment replacement.

The bottom line is what can you offer at a discount or a loss, that has value for the customer while generating customer loyalty and long-term profitability.  Think outside the box!