Products That Cost More To Make Than To Buy

By Annie Mueller | September 23, 2010 AAA

If you're the primary grocery shopper in the family, you probably keep an eye on the weekly ads, and you might notice that grocery stores offer some amazing deals on a couple of items every week. Those deals are usually so great that the grocery stores lose money on them. So why offer such a deal? It gets you - the consumer - into the grocery store, where you'll buy far more than those few items. In fact, because you're saving so much on the sale items, you may purchase even more than you normally would. (For more, see A Map To Grocery Store Savings.)
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The Loss-Leader Marketing Strategy
The loss-leader marketing strategy is often associated with King Camp Gillette, a salesman who, around the year 1900, was having a bit of trouble selling his marvelous product: disposable razor blades. So Gillette decided to give away the razor handle which fitted the blades; folks got a free product, which he lost money on, but they "saved" so much on the handle that they didn't mind spending on the disposable blades that went with it.

After several blade purchases per consumer, Gillette would make back what he had lost on the handle - and then some. The loss-leader marketing strategy was born.

Beyond the Grocery Store
This loss-leader marketing strategy isn't just in play by the grocery stores in your area. Have you bought a cell phone lately - or ever? How about a computer on one of those holiday deals that roll around, or perhaps a gaming station like Xbox or PlayStation 3?

Take a moment to turn your head from your computer to that ink-jet printer, and you're looking at another loss-leader item. The ink-jet printer is one of the most obvious loss-leaders; you can purchase a brand-new printer for as little as $25 if you do a little comparison shopping online. It only occurs to you that things are a little off when you need to buy a new ink cartridge - and it runs about the same price as the entire printer did.

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Contracts and Loss-Leader Strategy
Telecom companies invest in their customers by offering regular upgrades and discounts on popular phones; you get a new phone for free, or deeply discounted, but the condition is generally a contract renewal. That contract gives the phone company a guarantee that they'll recover that investment they made in you, the customer. That's why there's a penalty fee for canceling out your contract early. It's simply insurance for the phone company's loss-leader marketing strategy. If you drop the contract, they'll still get the money back to cover the cost of the phone.

Other contractual "deals," such as a free or discounted coffee maker when you sign up for a 12-month coffee subscription plan, are duplicated with all sorts of consumer products. The loss-leader is the initial freebie or discounted item; it pulls you in with the instant gratification of a great deal. In the long run, though, that great deal usually turns out to be full price.

Extreme Loss-Leader Marketing
When Sony launched the PlayStation 3, it was with a loss-leader plan. The company knew it would lose money on every console sold, but what was lost was made back in games, extended warranties and gaming accessories. But the loss being eaten by Sony in 2006, when the PlayStation 3 was first released, was estimated by research company iSuppli to be around $300 per unit. It takes a lot of games to make back $300 of consumer investment. What saved Sony was its focus on reducing manufacturing costs as quickly as possible so losses went down as well.

By December, 2009, iSuppli estimated Sony's loss at only $37, a huge drop from their initial loss-investment per unit. And by February, 2010, it was estimated from Sony's financial reports that their losses were down to $18 per unit, with Sony predicting a 15% reduction in PS3 production cost by March, 2011. It's a lot easier to recover a loss of $18 per consumer than one of $307.

Loss-Leader Marketing and the Consumer
That's you, Mr. or Ms. Consumer. You're the one targeted by these companies to jump in with the irresistibly great deals, which they hope you'll pay for by buying the warranties, accessories, monthly subscriptions, ongoing services and tech support that you'll find offered alongside the loss-leader. The thing to remember as a consumer is this: loss-leader items aren't necessarily a bad deal, but they're not exactly the great deal you might think they are. (For more, check out Products With Surprisingly Low Markups.)

For the latest financial news, check out Water Cooler Finance: The End Of The Recession.

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