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.

Power Of Irrational Positive Thinking

Some time back The Wall Street Journal had a piece on how some people are supplementing their income by starting a hot dog stand. The story reported that some people are making money by running these stands. The untold data in the story is the number of hot dog stands in those markets and the distribution of sales and profit for these stands. The danger is if others should see the success of a few and start their own stands.

Is it not pure luck that these early starters made any money at all from their stands? After all there is nothing unique about a hot dog and it is pretty much commoditized. However more will be tempted to start their hot dog stand because of the power of irrational positive thinking that make people underestimate risk and overestimate success. People choose to look only at the few who succeeded and overlook many who failed, and convince themselves that they will be in the former group.

Irrational positive thinking is not isolated and it is not dependent on demographics. Ease of availability of cheap technology has brought out the digital hot dog vendors in all of us. Just like the  real hot dog, these digital ones are  indifferentiable from one another and compete in a market that has no barriers to entry.

Of course, someone making money from this frenzy are the hot dog stand makers, and those who want you and I to be the next big time “hot dog stand” owners. If there is really money to be made from these “hot dog stands” why are these book authors not investing all their resources in it?

Ideas Marketplace

Eureka Ranch Technology is launching an ideas marketplace, Planet Eureka for brining together individuals with ideas and small businesses and big corporations looking for ideas. As the WSJ says, it is meant to help “small businesses looking to find a hot idea — or trying to sell a hot idea to big company”

Their site says, “Research indicates Small Business start-ups are 10 times more successful executing innovations than corporations (SBA, Journal of Mkt. Research, Ranch Research).”

I question the premise and the conclusion they draw from the research. The first point is trivial, correlation does not mean causation. The other main argument is that Eureka is only looking at data on successful ideas. What about the unsuccessful ideas? What proportion of the failures come from small businesses?

They do not provide link to the research and the data they looked at. Even if the claim can be taken at face value, what does it say about the ideas themselves? How is a big corporation going to find the needle in the haystack?

I believe ideas are not that difficult to find, especially for businesses that know how to execute profitably. If the idea is to link the patented ideas with executioners, doesn’t the patent database already fill that role?

I found some of the research alluded to in their website at SBA.gov, it is in the 2004 report to the president(PDF), page 183. The article has this important caution:

A few preliminary words must also be said to avoid misunderstanding of just what it is that is to be explained. It is not the hypothesis here that a large percentage of entrepreneurs employ innovation in the new firms they create. On the contrary, the evidence, imperfect though it is, suggests that most new firms are virtual replicas of many firms already in existence, and there is nothing innovative about them. Second, there is no suggestion here that even among that relatively uncommon species, the innovative entrepreneur, the preponderant focus is on anything that can reasonably be deemed breakthrough innovations. Here again, casual empiricism indicates the reverse—that the bulk of the novelties they introduce are only slightly better mousetraps.

that among the (rare) innovations that can be considered to be radical, a disproportionate share is provided by independent innovators and their affiliated entrepreneurs.

It does not say anything about successful execution of ideas but does say a lot about the quality of ideas.

Ideas marketplace is not a new idea and an unnecessary execution.