Thursday, August 15, 2013

Loss Leader Model for Business

In this history about book retailers, one thing that stands out is how B&N broke the book retailer model of making 40% margin on bestsellers to instead chase volume into its stores. It was the loss leader mentality (that you could say still exists today in the Freemium model).

Loss leaders are used by any large store - grocery, Wal-Mart, Walgreens, Target - to attract traffic.
Grocery stores make about 3% margin on food but make 30% on non-grocery items like utensils, light bulbs, batteries. It is the cross-selling and the upsell that keep the lights on.

If every shopper just purchased the items on sale, the store could not survive. However, enough people, out of convenience and impulse buying habits, grab other items. (Smaller stores with much less traffic can't make the loss leader model work.)

The indie book retailer is dying because they didn't adjust their business model to the changing way shoppers shop.

Ask yourself: what do I upsell or cross-sell to my own customers?

The indie book retailer has the same issue as B&N: not enough traffic to keep the lights on. How do they change that? (I have thoughts here.) However, when you think the problem is Google or Amazon (as newspapers, publishers and retailers do), you don't address the real problem: Your Business Model!!!

If you complain about ATT or your ILEC or the Cableco or the CLEC, you are expending energy in the wrong direction. You can't change what they do!!! You can only change your attitude about it and your reaction to it!!!

It often isn't about price. Why would there by convenience stores? It is about the following:

  • Do they - the market - know who you are?
  • Do they know what you offer?
  • Is it easy to buy from you?
  • Do you have services that can increase ARPU?

You can sell stuff at zero margin IF you can convince enough people to buy the premium service or luxury items that pay big margin and IF you can get the volume needed to make the model work. When the model was working, book stores saw a lot of traffic.  It isn't working now because traffic is way down. The model could work if the book retailers targeted the most profitable customers and delivered a premium service to that niche. But that is a pivot that many are not capable of due to being mired in their current (dying) business model.

SIDE BAR: From Liar's Poker:
  1. The market tends to overreact to significant events, and it pays to be a contrarian.
  2. Analyze and act on secondary and tertiary effects to significant events quickly before the market becomes aware of them.

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