Loss Leaders That Drive Higher Customer Revenue

I used JCPenney’s as a case study for explaining pricing waterfall and price realization. One could read that chart as ineffective price realization but the only message one should read from that chart is how different promotions affect the pocket price. Why would a retailer be doing this heavy promotion? They could be focusing on “per customer revenue” and using mattresses as loss leaders.  For instance take a look at this new pricing chart that reverses the waterfall.

Effect of Loss Leaders  On Per Customer Revenue
Effect of Loss Leaders On Per Customer Revenue

The chart shows not the average revenue but the possible revenue for a single customer who might purchase all the extras. This does not mean every customer makes all these additional purchases. JCPenney probably has years worth of data on customer purchases that tells them the percentage of customers (who buy mattresses) buy the extras and carry a balance on their JCPenney credit card.

The bars in black are high margin sales. Here are the additional revenue opportunities:

  1. Warranty: JCPenney sells a warranty on warranty that comes as a 10 year supply of mattress pad. They give one mattress pad at the time of purchase with the promise of free replacement for the next 10 years.
  2. Bed-In-A-Bag: Customers buying mattresses are most likely to be interested in buying new sheet sets etc.
  3. Room Accessories: Why not change the curtains in the room as well?
  4. Interest Income: Some of the customers who has or open a new JCPenney credit card may carry a balance and hence paying interests.

Together all these components increase per customer revenue from $630 to $1173, still lower than the list price of $1699 seen for the mattress but that could easily be a marked up price that no customer would ever pay. The net is the low sale price on mattress (loss leader) help to improve money spent by the customer during a visit.