Free Coffee and Other Loss Leaders

“It seems odd that this place lets you take as much coffee as you want,” my father remarked the other day, glancing around our favorite breakfast place. “The coffee house across the street charges more for a cup to begin with, and they charge extra for a refill. Why do you suppose this place doesn’t?”

“Probably for the same reason they don’t charge extra for refills on these soft drinks,” I replied, raising mine. For reasons unexplained, I don’t like coffee, so I was having my usual Diet Coke with my breakfast. “This soda cost me $1.50, and it isn’t possible to drink $1.50 worth of soda without rupturing yourself, so they’ll make money on me even if I sit here all day refilling my cup. The coffee costs about 10 to 15 cents a cup; a bit more if you add cream or sweetener, but most people won’t have more than a cup or two at a sitting, and they’re charging $1.80 for the coffee. If you drink two cups instead of one their margin goes down a bit, but they’re still making money.”

“Well, I suppose that’s true,” he replied.

“Plus,” I went on, “There’s an excellent chance that if you sit here long enough to enjoy your second cup of coffee you will go back up to the counter and purchase more food to have with it.”

My father, who had just done exactly that, glanced over at the cash register. “That’s certainly true,” he agreed.

“And then there’s the competitive advantage it gives them over the coffee house,” I concluded. “Not only do they have actual food choices here, but somebody who just wants to sit, drink as much coffee as he feels like having, and relax is much more likely to come in here, once he thinks of it, than go sit at the coffee house where he’ll have to buy his refills and deal with huge crowds of people storming in and out of the place to get their coffee.”

“You spend way too much time thinking about these things,” he told me.

“It’s an occupational hazard,” I replied. “Most people only think of loss-leaders in terms of items they can sell for lower cost than the competition, to bring in more customers. They don’t even consider ways you could add value for the customer by making their actual purchases go farther, but that’s just what a free refill policy does – without having to take an actual loss on the product.”

“Sure, but that’s only going to work for drink refills – and anything else that doesn’t really cost much by volume,” he objected.

“Not necessarily,” I replied. “Think about one of those ‘Buy 4, get 1 Free!’ deals. If the item costs $1 and you sell it for $2, then a 5-for-4 special means you’re selling $5 worth of product for $8. If the customer was only going to buy 1 or 2 of them, you’re making more money on the sale than you would have to begin with, and even if they take you up on the deal, you’re still making a good profit. If the product costs you $1 and you sell it for $10, they you’re selling $5 worth of product for $40, and I can’t see anything wrong with that idea. Of course, none of this will work on products with low profit margins; for that you’ve either got to find something that increases value for the customer without costing money, or convince them to purchase some other product from you. But the principle is the same.”

It was about that point that we had to leave to get to work. As we were leaving I reflected that in all fairness, there are some types of business where the “loss-leader strategy” will not apply, and some in which it will never be necessary, but the basic concept of increasing perceived customer value always works. Have you considered how you might offer more value to your customers lately? Maybe you should…