As a seller, I'd like to explain the concept of loss leading and then I'd like to tell you why I don't do it, why you should be aware of it, and how the world could be a better place without it.
Sellers would be more secure and more profitable, buyers would be happier, and more trusting of sellers, and eBay would actually make even more money and this might possibly avoid another fee hike, which would keep prices low across all of eBayendom.
There's a quote in a book I was recently reading (There's a bibliography at the bottom of this guide) from an eBay Powerseller, he said “Most Titanium Powersellers are only three steps away from bankruptcy”, what's more they are painfully aware of it.
What is loss leading?Loss leading works like this: I have 3 products, they all cost me £10, and they are related products, for instance, one is a little girls dress, the other a ribbon matching the dress, and the other shoes for the dress. (Obviously the cost would not be £10 for a ribbon, but for the sake of explanation..). Loss leading is where I set the dress at £6 with a loss of £4 but the ribbon and the shoes at £20 each with a profit of £10 on each (the prices are obviously more subtle than this). The chances are, if I give you the opportunity to also buy the ribbon and shoes, you'll buy at least one.
So you search for a dress for your little girl, and here's a “well priced” dress. You do some research and find that for the same item, you can get it from me for way less than someone else (who isn't loss leading that item). So, you make the decision to buy the dress, but wouldn't that ribbon look so cute with the dress? Most people, instead of going elsewhere for the ribbon think, well 1) I now trust this seller to give a good price, and 2) I've saved so much on the dress, I may as well get the ribbon.
Thus the seller buys ribbon and dress for £20 and sells for £26, £6 profit. The buyer is happy, because they think they got a good deal, the seller is happy because they made a profit. However, on the other hand perhaps the seller is sometimes unhappy because his conscience is saying “aren't I deceiving people?” The buyer would also be unhappy if they knew that they could have bought the dress for £12.00 and the ribbon for £12 and spent £24 instead of £26.
How Loss Leading Affects the BuyerHere's some more simple psychology. Researchers used to directly ask people “What's most important to you when you're considering buying an item”. The answer would almost always be “I'll buy the cheapest”. Then, they'd observe their behaviour, and find that often the buyer did the exact opposite of what they said they'd do: thew would buy the most expensive, or buy at medium range. Researchers found that whilst most people primarily look for the cheapest item, they soon realise that the cheapest item often doesn't add the same value. Value is a multitude of things, some examples would be customer service, customer treatment, trust worthiness and perceived competence. They then go on to find the best priced item, i.e. the least expensive for the best value.
This is all good and fine, except there's another issue that comes into play in the shopping process. It's called benchmarking. An example of benchmarking is when I tell you the retail price, and then I let you know how much I'm willing to part with the item for. Instantly, I seem well priced because the retail price is obviously higher. Assuming the RRP is true, I don't see any problem with doing this. Another form of benchmarking is when you see an item at a certain price from one seller, and then see it at different price from another. The cheaper price will be your benchmark, particularly if there is little difference between what the two are offering (i.e. they have similar feedback, similar postage, similar delivery times, similar service etc, and the item is exactly the same).
So say someone sells a DVD that costs them £4 to buy, but they are selling for £2.99. The benchmark for that item (and DVD's in general, seeing that they are essentially a commodity), in the buyers mind is 2.99. People essentially assume that if a seller can sell at that price, then other sellers must be ripping them off. Before I knew this, as a buyer on eBay I could get quite annoyed that someone was charging such an extortionate price for an item when I'd seen it two minutes ago for way less – but most likely the case was the person I was angry with was doing the right thing: selling at a fair price.
How Loss Leading Affects the SellerOk, so for sellers here's the net result: They do make a profit, but the larger they become, the greater the risk of becoming instantly bankrupt. This has actually happened many times to eBay Powersellers, who can be here one day and completely gone the next. If the loss leading is even slightly mismanaged, the larger the seller the more the mistake is magnified. Secondly, what if the customers wise up after reading articles such as this and only buy their loss leading items? And then buy loss leading items from their competitors? Obviously, bankruptcy is again the result. There is a better way.
Options for the BuyerNow that you have knowledge of this, you could do one of two things, and really it's about a trade off of time against money, and also about whether you feel a moral obligation to preserve the lives of many loss leading sellers.
Option 1: Spend time identifying products that sellers are loss leading on, and only buy the loss leading products, you will save a lot of money but it will cost you a fair amount of time you could have used to earn more money, or for relaxation from working hard.
Chain Reaction: If a lot of people began doing this, many sellers would be put out of business, they might not have time to adapt to the changing behaviour of eBay buyers. If eBay lost revenue because of this, they may put selling fees up to preserve their revenue stream, this would consequently affect the remaining sellers bottom line, making those who don't adapt quickly enough (and the larger one is, the harder it is to adapt quickly) also go out of business, and those that remain put their prices up. Thus prices would go up, buying options would go down.
Option 2: Save time, and money by identifying sellers (such as The Yireh Store) who don't practise loss leading, in fact the more you purchase from such sellers the less it will cost you. Taking the dress example,
Loss LeaderTheir Price:
£10 dress, £10 ribbon £10 shoes : £30
£6 dress £20 ribbon £20 shoes: £46
Non-Loss LeaderTheir Price:
£10 dress, £10 ribbon £10 shoes : £30
£12 dress £12 ribbon £12 shoes: £36
A non-loss leader can afford to make less profit per item, because they aren't having to risk compensating profit losing items. Furthermore, buying from non-loss leaders would enable loss leaders to gradually change with the changing market, as more and more people bought from non-loss leaders they would have to rethink their strategy. This would be a kinder approach to all involved.
Options for Sellers:If you'd like to become a non-loss leader, or are already one get in touch and we can talk about setting up a non-loss leader society, where buyers can find someone who isn't willing to practice loss-leading.
BibliographyNote, the views expressed here, and the information presented here is not directly found in the books, sometimes the books advise to the opposite effect, but they did inspire the author – thus it is only right that they should be acknowledged:
Title Author ISBN
Smarter Pricing Tony Cram 0-273-70613-6
eBay Billionaires Club Amy Joyner 978-0470-05574-8