The Bottom Line
Loss Leaders can boost earnings like no other
The term ‘loss leader’ can be a bit misleading at the onset, steering restaurant professionals away due to its negative connotation. Look further into the art behind loss leaders, however, and realize that they open up a whole new world for pricing strategy, menu engineering and word-of-mouth marketing.
Loss leaders can take many different forms, from standard menu items to happy hour specials, discounted drinks and everything in between. They all share one common trait, however—in one way or another, all loss leaders meant to boost sales of other items.
Let’s go over a few loss leader examples and how they can drive profitable volume at your establishment.
Perhaps the most common type of loss leader, lower-priced items are meant to draw customers in through the door. Often enough, these are standard menu items that don’t have any promotions or discounts tied into them. However, once a customer sits down and takes another look at the menu, they’re enticed to order some appealing, higher-priced items.
Burgers are a classic example: many new-age gastropub-style spots will incorporate a ‘hip’ burger onto the menu that’s about half the price of the rest of the entrees. “Oh, I can get away spending $16 for an entrée” circulates through prospective customers’ heads. But the desired effect soon sets in: “Okay, the steak frites look so good, and they’re just $5 more. And those cocktails look excellent. And they have truffle fries?!?”
Happy hours are a tried-and-true method of attracting customers during otherwise low-volume times, but even already-discounted menus are prime real estate for loss leaders. It’s very easy to mark down a few high-margin items by as much as 75% and promote the heck out of those prices, while featuring other items at a much smaller discount, or no discount at all. The same gastropub can woo people in with $2 pretzel bread/cheese dip and $3 draft beer, but sell $8 flatbreads and $10 cocktails at the same time.
Upsell is the key to converting profitable sales. Once the customer walks in through the door and sits down, the low-priced items have done their job and don’t even have to be mentioned. If the customer wants to stay on the cheap route, fine, but the opportunity is there for you to promote your restaurant’s full experience.
Higher-price items drive volume in a completely different way: they make everything else on the menu seem cheaper. You’re not exactly going to draw in new customers by advertising these dishes, but you will likely see success in upsell, cross-sell and repeat visits by fencing your core menu items in the middle of lower and higher-priced selections.
From a consumer psychology standpoint, ordering ‘from the middle’ is almost mandatory. In a group setting, people don’t want to come across as being cheap by getting the lowest item on the menu. At the same time, they’ll often steer away from the most expensive item, especially when they know the group is splitting the check or that someone else is taking care of the bill. Additionally, high-price items are a critical complement to low-price items because if you’re only upselling to the middle, customers have less of a chance of feeling gouged.
Two key components to high-priced items exist:
1 Do not expect to sell many of them. Their loss leader status comes from volume, not price.
2 Do not make these your ‘signature’ items. Some restaurants’ ‘must-order’ dishes are literally twice the price of everything else on the menu…this is a great way to upset your customers and ensure that no matter how good those items are, they ‘won’t be worth it’ and you will have a hard time getting people in for a second visit.
Discounts are the go-to for getting people in through the door, but only drive profitability if they lead to upsell, repeat visits or both. Tie your discounts into an overarching strategy: whether discounting/giving away appetizers with entrée purchases to encourage multi-course meals, selling 2-for-1 drinks to promote your new cocktail menu, etc.
Some tactics, however, only loosely tie to price but spark tons of conversation about the restaurant. Todd English P.U.B. at Crystals, Las Vegas is a prime example with its ‘hourglass challenge.’ Customers choose a beer off the menu, and if they finish it in seven seconds or less, it’s free. Whether they complete the challenge or not, it creates a story that they share with their peers for years to come.
Each of these methodologies can be applied to virtually any restaurant or bar. Just be sure to monitor their impact to ensure that they’re boosting your bottom line.