Loss leaders and small businesses don’t mix – Take a perfectly good product, slash the asking price and throw it out to your potential customers. At first glance it can seem like a good idea: you want to build a customer base, people who are going to try your product or service and then come back for more (at the full price of course) and even tell their friends about it.

After all, everyone loves a bargain, right?

Loss Leaders and Small Businesses Don’t Mix

The problem is that schemes like Groupon – loss leaders, require you to sell your product or service at a loss. Why on earth would anyone want to do that? Not only could this practice damage your chance of repeat business if handled badly but it may also damage your reputation in the market place. Ever tried to increase your prices by 15%? Can be tough huh? Try increasing it by 80% because that is essentially what you will have to do to turn loss leader customers into repeat business at full price. Other pitfalls of loss leaders can include:

• Compromising on quality – yes I know, no one sets out to do this, but think about it, sub-consciously you will be treating these customers differently. They are getting your product or service at rock bottom prices!
• You risk the client will tell friends about the great deal they have rather than how great your products are.
• Groupon customers are Groupon customers – not yours!

Yes, under certain circumstances, loss leaders may well be an appropriate way to build custom. There are some perfectly respectable entrepreneurs out there who swear by them as a marketing tool. Here’s a recent example from my own experience that may help to explain why I’m not such a fan.

I recently booked a spa day for myself and my husband through Groupon, an additional treat for our wedding anniversary. When we arrived at the spa, there was no one to greet us and we had to find our way around alone. Now, that may have been the way they normally operate but it was a bad start to our cut cost spa day. When we did encounter someone to show us to the changing rooms it took a guest to explain that they hand out padlocks to lock the lockers, which weren’t given to us by the staff member (the guest kindly gave me hers). My hour long facial took just over 40 mins and the beautician had a bit of a cold which meant she sniffed every couple of minutes making this a less than relaxing experience.

It’s difficult for me to totally blame the spa. They had been forced to accept bookings far below their normal fee. So rather than seeing this as an opportunity to impress, staff saw it as a chore, something to be got through as quickly as possible, with none of their normal frills. Despite booking and agreeing a time for arrival and treatment times the lack of greeting meant we felt unwelcome. The final clue, not once did a single member of staff attempt to up sell anything, drinks, food, more treatments, a return visit – nope nothing. What a complete waste of an opportunity!

The company aim when agreeing to this Groupon was no doubt to encourage more clients to try them. The trouble is that a different mentality often takes over – that of having to handle a client who is not paying the full fee. It means my husband and I came away from the experience less than impressed and not wishing to return. Our experience, I am sad to say, was a more than a little underwhelming. That means we aren’t going to tell our friends what a wonderful time we had either. Oh the irony of me telling you what a let down the experience was – probably a far cry from what the organiser wanted to achieve.

As far as I can see the problem with loss leaders is they increase your number of sales whilst damaging your profit margins and your reputation! Loss leaders can work well for certain industries, but I think for the most part Loss Leaders and Small Businesses Don’t Mix!

What is your experience of these kind of deals, as a business owner or as a consumer?