Business Math in Action

Is It a Good Deal or Just a Good Ad?

Ever notice the newspaper ads where a shiny new car is listed for sale “below invoice?” Look closer and you may see in very small type, “One at this price.” This car is a loss leader. Suppose you went to the car dealership to buy that particular car. What if the dealership never had that car in stock in the first place? Then the ad would be a bait-and-switch scheme. Loss leaders and bait-and-switches are among the strategies retailers use to attract customers. Some of these advertisements border on the illegal, and some cross the line.

It’s against the law to use bait-and-switch, where a store purposely advertises an item it doesn’t have, then offers the customer another item that is “just as good.” Although most stores don’t use bait-and-switch advertising, they do use the following pricing tactics to draw customers in.

Loss leaders. Loss leaders are items sold at a loss to the store, in the hopes that customers who come in for the bargain will buy other goods as well. The total purchase will make up for the amount lost on the loss leader. Loss leaders tend to be items people buy on regular basis, like milk. Everyone knows how much milk usually costs, so if it’s priced especially low, people will instantly recognize the bargain. Loss leaders are often placed at the back of the store so people will have to walk past many other products on the way to pick up their good deal.

Razor-and-blades pricing. This pricing method gets its name from the way razor handles and blades are sold: the handles are cheap, but the disposable blades are expensive. The strategy works with products that need replacement parts, such as printers, or with products that are used along with other products, such as DVD players. Consumers will have to buy many printer cartridges and DVDs, so the printers and DVD players themselves can be priced tantalizingly low.

Low-margin products. This is the opposite of razor-and-blades pricing. Here the replaceable items are priced very low but the product required to use them is expensive. Example: Downloading iTunes is cheap, but iPods are costly. Another type of low-margin pricing would be carpet-cleaning services that offer bargain rates for cleaning three rooms but charge much higher prices for additional rooms, spot cleaning, and area rugs.

Guaranteed Lowest Price. Some stores advertise that if you can find the same product anywhere else, they will match or beat that price. The catch is in the word same. Try to convince a mattress dealer that you’ve found the same mattress at another store, and the dealer will probably tell you that the other mattress isn’t exactly the same. Mattress companies are famous for this. The very same mattress, made at the same manufacturing plant, may have five different names at five different stores. That makes it impossible for consumers to compare prices from store to store.

Businesses need to advertise to attract customers. They have the right to do so as long as they aren’t lying, but you still have to be careful. Learn about how products are priced and advertised, and that knowledge will be useful the rest of your life. Pricing and advertising tactics don’t change much. Fifty years from now you may not recognize your city, but you will definitely recognize if you’ve been the victim of a bait-and-switch.