Loss Leader Marketing
How to embrace increased market share with deflated profits
By Robert Gitman
Loss leader marketing isn’t anything new. Retailers have been successfully using this strategy for decades, but it certainly has changed the landscape of retailing. The same is true for our industry. I can remember laboratory advertisements from 35 years ago that focused on loss leaders. But today it’s more of a challenge because we need to not only successfully manage labor and materials, but also invest in expensive technologies to remain competitive. That means that loss leader marketing significantly contributes to razor-thin profit margins.
Loss leader marketing is the practice of selling a small number of restorations, either at or below cost, in an effort to gain market share. Two strategies exist that support this pricing model:
1. You price a restoration relatively lower than the price of a similar restoration offered by competitors (while still maintaining a profit), thereby “pulling” customers to your laboratory.
2. You price a restoration at or below cost based on the assumption that dentists will purchase additional restorations/prosthetics over time at full price that have a high profit margin, thereby offsetting the loss.
Regardless of the strategy, loss leader marketing can be a great way to grow your laboratory. Using this method you can entice former customers to return or prospects to try the laboratory, and retain current customers so they aren’t lured away on a “loss leader” price. But if you’re not careful, you can lose a lot of money.
Here are some of the advantages and disadvantages of loss leader marketing.
Gain market share. Sales will increase and profits can be recouped on the increased volume in units along with the purchase of non-discounted laboratory services that have high profit margins. Remember that everyone loves a bargain. If dentists find one loss leader that they like, it is likely that they will come back looking for another one. The loss leader is a time-honored business strategy that helps to build repetitive sales.
Customer appreciation. Another use of loss leaders is to allow sales people to heavily discount a restoration for a specific situation; for example, when a dentist-customer is spending more on high-profit items such as full-arch implant-retained cases. Allowing sales people to offer deep discounts lets them use their discretion and make it seem “special” to the customer—hiding the fact that other customers may well be getting the same deal. When dentists feel they are getting an exclusive offer, or that the sales person is desperate to close the sale, they may be persuaded to become a customer when under normal circumstances they may not.
Risk of loss. A laboratory may incur a substantial loss from this pricing strategy if it does not limit the quantity and time of the loss leader; the risk is that dentists may buy only the loss leader, and in large quantities. Be sure that the lost profit can be countered by the sales of other laboratory services. If you price something too low, and dentists don’t buy anything else, the loss leads nowhere. It’s no longer a loss leader; it’s just a loss.
Pricing perception. Retaining a deep discount for too long can give dentists the impression that a product should have a lower price at all times, which can reduce the restoration’s unit sales when you discontinue the loss leader promotion and return the product to its normal price.
Laboratory reputation. Conduct thorough market research to find out why dentist customers work with your laboratory and why you may be losing market share to competitors. Many laboratories do not spend adequate time with this type of due diligence and decide the quick route to increased sales is through loss leader marketing — but this change in pricing strategy may cause damage to the reputation of the business and be in opposition to the “branding” of the laboratory.
While loss leaders are a useful way to tempt customers into sending casework to your laboratory, they are not without their controversy. The strategy is sometimes seen as unscrupulous because it allows larger laboratories to leverage their spending power to crush smaller competitors. However, the more vexing question comes down to: “Does the use of loss leaders help drive customer loyalty or foster disloyalty?” It depends on how you define your laboratory’s value proposition.
Robert Gitman is the Company Administrator at Thayer Dental Laboratory in Mechanicsburg, Pennsylvania.