When you go to a store for a quick post-work grocery run, hoping to pick up a cheap, ready-made meal for dinner. After finding a discounted pre-cooked chicken, you toss a bag of rice and veggies in your shopping cart too, even though none of them were on your list.
According to experts, the behavior plays into a strategy that grocery chains have long relied on to get customers through their doors, even if it means selling a certain popular item below cost and with food prices continuing to increase even as overall inflation has slowed, shoppers could be even more vulnerable to overspending after finding a good deal.
Known in the industry as loss leaders, those good deals are designed to appeal to the customer’s desire for convenience and savings, while at the same time piquing their interest in other goods.
It can tempt a large number of customers to change their shopping behavior once they’ve entered the store. With that saving in mind, they might be less price sensitive towards other items, says Andreas Boecker, who chairs the University of Guelph’s food, agricultural, and resource economics department.
The overall approach behind the loss leader is that the loss is more than compensated by the higher margins and the sales of the other products which are produced by attracting the customer to the store.
At $7.99, Costco’s pre-cooked rotisserie chicken serves as one of the more familiar loss leaders at grocery stores in Canada, while other chains mostly prioritize discounts on bread or dairy.
Subscription membership programs connected with various chains also increasingly offer deal pricing or points on certain items tailored to the consumer’s purchasing trends.
With customers vulnerable to temptations, loss leaders are typically placed strategically to guide the consumers through the store so that they have to pass by as many aisles as possible, says Boecker.
He said not just any product can serve as a hook to reel the customer into the store. One of the most important prerequisites for a loss leader is that it’s perishable.
If you can store it, then of course you would buy an awful lot of the product, and then the company would experience a big loss, he said.
But prioritizing staples for below-cost pricing may not be effective for stores over the long term, said JoAndrea Hoegg, a marketing and behavioral science professor at the University of British Columbia’s Sauder School of Business.
It would be something that is not essential to buy but like a rotisserie chicken might be something nice to have and it’s not something that you’re going to purchase every week.
Authors Young Hwan and Julian Wright said companies often advertise low prices for certain basic products to make a better-quality product’s price seem worth the extra money.
According to a study, firms make a loss on some consumers, who buy the basic version of the good, and a profit on others, who buy the upgrade.
The ability to take a financial hit on certain products so customers will be tempted to spend on others is a luxury that benefits the largest chains.
Authors Zhijun Chen and Patrick Rey said that the exploitative use of loss-leading appears to be a robust feature in market environments where a few large retailers enjoy substantial market power over one-stop customers and compete with competitors that focus on narrower product lines.
The convenience factor plays a massive role in why bigger stores use the strategy so effectively, said Boecker. A customer may not sweat the extra $5 spent on a product they’ll eventually need when they’re already at the store.
That is probably through all income levels, all price sensitivity levels because we are all time-strapped, he said.
Hoegg said that although a good deal can be hard to resist, it’s important for customers to employ a certain level of skepticism to avoid getting sucked into an unnecessary shopping spree.
Companies are not going to give goods away unless it is beneficial to them, so it’s just thinking it through from the firm’s side, having that little bit of persuasion knowledge, such as ‘Why is this on sale?’ she said.
If it seems too good to be true, then just be very cautious when you’re purchasing that good and make sure that you’re not getting caught up in that sort of shopping wave and spending more than you meant to.
