The term ‘loss leader’ often brings negative connotations for restaurant owners and managers, but did you know that when used properly a loss leader pricing strategy can be an effective way for restaurants to drive new profits?
In this blog, we’re going to take a look at what exactly a loss leader is, how loss leader pricing strategies work and how you need accurate restaurant inventory management processes to ensure it works effectively.
What is a loss leader?
A loss leader is a product on your restaurant’s menu that is sold below cost price, in an attempt to entice customers into your business and stimulate more profitable sales as a result.
Loss leaders in a restaurant can take many forms. It could be a gift to customers on their birthday, it could be simply reducing the price of your most popular dish, or it could be a range of ‘happy hour’ deals such as ‘kids eat free on Wednesdays’ or ‘half-price oysters on Saturdays’.
The idea is that, although the restaurant will lose money on the specific dish or product that it has reduced the price on, the business will make up for the loss in other ways by encouraging more customers through its doors and upselling other products.
Does loss leader pricing work?
A loss leader pricing strategy should be focused on helping your business make more money through upselling, add-on purchases and building a base of long-term, loyal customers. When used correctly, loss leader pricing can increase your sales to the point of overcompensating for the loss on the product that you are using as a loss leader.
The most common benefits of a loss leader pricing strategy are:
- helping your business to breaking into a new market by offering something cheaper than your competitors;
- increasing sales through increased foot traffic;
- and building stronger brand loyalty.
It’s important to keep in mind that, just because a loss leader pricing strategy works for some restaurants, doesn’t necessarily mean it will work for yours.
What’s the risk?
Loss leader pricing can result in a huge boost to both your restaurant’s sales, as well as customer satisfaction. That being said, there is an inherent risk in pricing your products at, or below, cost.
Of course, the biggest risk in the loss leader pricing strategy is that customers will only come into your restaurant to buy the loss leader. If they don’t purchase anything else, then the strategy is only resulting in lost money for your business.
In theory, this is almost never true. Customers don’t just come to your restaurant to eat half-price oysters as that doesn’t make an entire meal, children don’t visit your restaurant for free without bringing their parents along and customers don’t typically only visit their favourite restaurants on their birthday.
What happens if the worst case scenario happens and a customer only orders your loss leader? Well, perhaps your restaurant does lose some money - but you have probably gained a loyal customer in the process.
Why your restaurant needs accurate inventory management for a successful loss leader strategy
A loss leader pricing strategy works hand-in-hand with your restaurant’s inventory management processes to boost the profitability of your business - but this only works if you have clear visibility into your inventory and how it affects your menu pricing.
By using an inventory management system to gain clear visibility into your inventory, your restaurant will be able to choose the items and dishes that are best used as loss leaders on your menu.
Want to learn more about creating a loss leader pricing strategy, or perhaps you want to improve your inventory management processes? Contact Sculpture Hospitality today. Our team of inventory management experts would love to help.