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Courier MBA Day 16: Using the Loss Leader Strategy

Let me take you back about twenty years ago.

I started seeing prepaid long distance calling cards for a penny a minute

This was back at a time that long distance phone calls cost at the minimum ten cents a minute. Usually a lot more. If you were a really really big company, you could get special phone lines in and pay around 4 cents. I mean, no one, not even these prepaid card sellers, were getting their calls for less than 4 cents a minute.

How could they charge only a penny a minute?

You read the fine print, and find out a minimum call was 30 minutes and you had a 99¢ connection fee. If you only called for a minute, you were charged $1.29.

The average long distance call back then was about 3 minutes. And here's the thing: Say you made three short phone calls. That's $3.87, and if you bought a $5 card, your balance is $1.13. You don't have enough on the card to make that fourth call, and there was no way to get your money back for the balance.

I used the heck out of those cards. That's because I made a lot of long distance calls where I could easily chat for a couple of hours. So I'd get 300 minutes or more of talk time. It cost that company about $12 for me to use the card and they only got $5 from me.

But they were okay taking a loss on that every once in awhile. Most people only used the cards once and would forget about it. So these companies would pay 12¢ and get $5 out of it.

This is something in business called the loss leader.

Think about the Black Friday sale that has that screaming deal. You know the store is losing money on that deal – it cost them more to get the merchandise than what they sell it for.

How can they afford to pay more for something than what they get?

That's the “leader” in loss leader.

They lead with that ad. It's a deal too good to pass up, so it gets you in the store.

And what do you do when you get in the store?

You buy all sorts of other crap that they make a profit on.

They lose money one one item but make a profit on the total deal.

Let's be honest: The shirts I'm giving away here? They're a loss leader.

I mean, they're genuinely a thank you for your participation. But if I kept doing this course and giving away shirts, if I kept putting this much time into a course, gave it away for free, and on top of that sent out shirts that cost me about $10?

How stupid is that?

But it's part of a bigger picture. I get paid by advertisers based on how many people visit the pages on my website. If people buy things off some of the links on my site, I get a small commission.

The thing is, I might get a few pennies from the time you spend on this website as part of the class. It's still a loss. I'm not expecting that I'll get any money off any of these links from this class – the odds are not high on that at all.

But here's what happens. I get to find out what is working and what isn't because you are going through this class. I get your feedback, or I hope so. Then I can then tweak it. I can create the class in something that I can set up to just automatically go out to anyone who wants to sign up for it.

In the end, I expect the experience in this class to be something that helps get more people here on the website. And that helps bring in more advertising money and I'll earn some commissions off some stuff people will buy on Amazon.

I'm losing money by giving away the shirts. But it's part of a bigger picture that can pay off in the end.

Sometimes it makes sense to take a loss.

We can use the loss leader in our delivery business.

I know a lot of people who will say never never never never take a super cheap delivery.

Most times I would agree. When you drive a lot of miles and only get three bucks for it, you lose money. It actually can cost you more than what you earn.

I preach that you should set your price.

But sometimes taking a cheap delivery can actually help you make more money.

Here is how the loss leader principle helps you make more money.

Practicing the principle keeps you in the habit of thinking about the big picture.

If you haven't noticed this already, big picture is a big thing for me.

The difference between just doing it and going whatever way the wind leads us, and intentionally running a business really comes down to big picture thinking.

I am extremely analytical when it comes to looking at delivery offers. Probably to a fault.

You don't have to agree with me that easily, you know.

But even then, there is always an element where I'm wondering, can this fit into the bigger picture? Can this delivery help me in some other way?

Usually if it's a cheap delivery, the answer is no. But sometimes….

The delivery takes you where you want to go.

When you get that delivery that takes you way out of your area. You drop off and there are so few restaurants around.

You have to make your way back to an area where you're more likely to get a delivery. That's dead time. That's time you're not making money.

And then a rare delivery from a restaurant near by pops up. It's taking you in the direction you are heading anyway.

At that point, I don't care that it's only paying $4. It doesn't matter that the profit per hour is well below my price. It's money that I wouldn't be getting otherwise for something that is only taking maybe an extra minute or two and not any extra driving. I'd be going that way anyway.

The delivery fills a gap.

You get an order that's going to pay quite nicely. You arrive and the restaurant's not going to have it ready for 20 to 30 minutes. This pays well enough that it's worth the wait, so you're not cancelling out.

And then an offer comes in on another app. It's a fast food place where you know the food is always ready when you walk in. You know you can get it done in probably about ten minutes and EASILY get back to the first restaurant before the food is ready.

At that point, I don't care how low the pay is. Like before, it's money I wouldn't have received otherwise. Basically it just adds to the profitability of the order you're waiting for.

The order helps you meet an incentive.

Some of these companies will offer a challenge or a bonus that involves completing so many offers.

In my area, Uber Eats has us do Quests. If I complete 25 deliveries by Thursday night, I get an extra $16. It's only 64¢ per delivery, so it's not that much. But if I'm sitting at 24 deliveries and it's getting late on Thursday, and a $3 McDonalds order comes in. Normally I'm saying no. But all of a sudden, that delivery is the difference between getting $16? It's become worth a lot more than $3.

A word of caution: I see a lot of people losing money by taking this idea too strongly too early. That's why I said it's only 64¢ per delivery. Early on the most you should be doing is evaluating if that extra 64 cents makes a delivery worth taking. It's only when I'm very close to completing something that I drop my standards when chasing a promotion.

If you're already on a delivery going the same way.

Say you are picking up an order at a restaurant. You get an offer on a different platform where the restaurant AND the customer are right on your way. You are confident you won't get stuck waiting, and you are confident you can hand the food off quickly.

At that time I'm not as concerned with how much it pays. It's like the delivery taking me where I want to go – I'll make a little more money for not much extra time or driving.

Use extreme caution on this one. I talked about this in Day 15: You do not want to take an offer like this if there is any way that doing so will significantly delay the order you already committed to.

When I do have an opportunity like this, I try to measure how much extra time I'm looking at. You're on the way to the customer for the first pickup and the second restaurant is right on your way. The customer from the second restaurant is further away than from the first. I'm asking, how much further am I driving? How much longer will it take? What does that second offer pay per minute for the additional time and distance?

Don't take a loss leader too easily.

Remember that we're talking about “loss.”

If taking the offer doesn't lead to a return in some other way, it really doesn't help you.

It's like the store selling the $25 X-Box. If they're just doing it to do it, they'll lose their shirts. But if they're confident that the profit from the other sales they make as a result will offset the loss, it makes sense.

Too many people will take a low paying order thinking, I might get an extra tip.

I can tell you from doing that too many times myself: You probably won't get that tip.

Don't decide based on hope. Decide based on an evaluation of the big picture.

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