4 ms·

"Enigma" It's called a loss leader.

dsr_ 8y ago
Well, if they were actually losing money on it, it would be a loss leader. But since the actual cost of the dog, bun, cup, soda, paper plate, napkins, condiments, labor and depreciation comes in under $1.50, it's not a loss. It's just money left on the table. Except -- it probably isn't. Costco isn't really a restaurant, it's a store which carries a limited number of high-value items packaged in bulk. The hot dogs (and the other low-priced food up front) are a form of complementary good, which more than pays for itself by enticing people to come in on their lunch breaks and shop for fifteen to thirty more minutes than they would if they had to stop for fast food somewhere else. And it keeps kids quiet when the parents want to spend more time there. Department stores have repeatedly rediscovered the utility of having a decent food option available on-premises - Neiman Marcus, Macy's, Ikea.
- dreae 8y ago
  It's absolutely a text book loss leader. A loss leader doesn't need to be sold below cost, only below its minimum profit margin. Leaving money on the table is effectively losing money.
  - mmt 8y ago
    I think you've said two different things here. > A loss leader doesn't need to be sold below cost, only below its minimum profit margin. I think that's an important point, in that you're saying that it's incorrect to consider only the cost of ingredients, rather than the entire cost of delivery (including cooking, labor, etc.). On the other hand, as the parent pointed out, they're not a restaurant, so their "minimum profit margin" for this particular activity is zero. As such, they can afford to do it, at whatever volume, indefinitely. > Leaving money on the table is effectively losing money. This is the different thing, since it has to do with what the market will bear and not with what it costs them. The distinction is important because a business can, by this definition, "effectively lose money" while still making a profit. That's good enough for some people.
    - dsr_ 8y ago
      It's not "effectively" losing money. It's losing imaginary money. If you want to see an actual loss leader, go to a grocery story in mid-November. They'll sell you a frozen turkey for (depending on competition) 20 to 50 cents a pound. Wholesale cost will be 80 cents to $1.20 a pound. They take an actual loss on the turkey in order to get you in the store where you will buy three times your usual weekly grocery budget in special holiday foods -- all of which are marked up more than they will be right after Thanksgiving. If selling at less than the market is willing to pay but more than what covers your total costs is a "loss leader", then every sale to attract customers is a "loss leader" and the term has no useful meaning.
      - mmt 8y ago
        > It's not "effectively" losing money. It's losing imaginary money. Well, to be fair, the money is real (or at least potentially real). It's the loss that's imaginary. > then every sale to attract customers is a "loss leader" and the term has no useful meaning. Agreed. We already have the word "sale" (or "discount" or "promotion") without using the inaccurate word "loss".
- thaumasiotes 8y ago
  > The hot dogs (and the other low-priced food up front) are a form of complementary good, which more than pays for itself by enticing people to come in on their lunch breaks and shop for fifteen to thirty more minutes than they would if they had to stop for fast food somewhere else. This is a loss leader. That's the entire concept. Taking your loss in the opportunity cost is still a loss.
emodendroket 8y ago
The article doesn't seem to suggest they're losing money.

dsr_ 8y ago

Well, if they were actually losing money on it, it would be a loss leader. But since the actual cost of the dog, bun, cup, soda, paper plate, napkins, condiments, labor and depreciation comes in under $1.50, it's not a loss. It's just money left on the table. Except -- it probably isn't. Costco isn't really a restaurant, it's a store which carries a limited number of high-value items packaged in bulk. The hot dogs (and the other low-priced food up front) are a form of complementary good, which more than pays for itself by enticing people to come in on their lunch breaks and shop for fifteen to thirty more minutes than they would if they had to stop for fast food somewhere else. And it keeps kids quiet when the parents want to spend more time there. Department stores have repeatedly rediscovered the utility of having a decent food option available on-premises - Neiman Marcus, Macy's, Ikea.

dreae 8y ago
It's absolutely a text book loss leader. A loss leader doesn't need to be sold below cost, only below its minimum profit margin. Leaving money on the table is effectively losing money.
- mmt 8y ago
  I think you've said two different things here. > A loss leader doesn't need to be sold below cost, only below its minimum profit margin. I think that's an important point, in that you're saying that it's incorrect to consider only the cost of ingredients, rather than the entire cost of delivery (including cooking, labor, etc.). On the other hand, as the parent pointed out, they're not a restaurant, so their "minimum profit margin" for this particular activity is zero. As such, they can afford to do it, at whatever volume, indefinitely. > Leaving money on the table is effectively losing money. This is the different thing, since it has to do with what the market will bear and not with what it costs them. The distinction is important because a business can, by this definition, "effectively lose money" while still making a profit. That's good enough for some people.
  - dsr_ 8y ago
    It's not "effectively" losing money. It's losing imaginary money. If you want to see an actual loss leader, go to a grocery story in mid-November. They'll sell you a frozen turkey for (depending on competition) 20 to 50 cents a pound. Wholesale cost will be 80 cents to $1.20 a pound. They take an actual loss on the turkey in order to get you in the store where you will buy three times your usual weekly grocery budget in special holiday foods -- all of which are marked up more than they will be right after Thanksgiving. If selling at less than the market is willing to pay but more than what covers your total costs is a "loss leader", then every sale to attract customers is a "loss leader" and the term has no useful meaning.
    - mmt 8y ago
      > It's not "effectively" losing money. It's losing imaginary money. Well, to be fair, the money is real (or at least potentially real). It's the loss that's imaginary. > then every sale to attract customers is a "loss leader" and the term has no useful meaning. Agreed. We already have the word "sale" (or "discount" or "promotion") without using the inaccurate word "loss".
thaumasiotes 8y ago
> The hot dogs (and the other low-priced food up front) are a form of complementary good, which more than pays for itself by enticing people to come in on their lunch breaks and shop for fifteen to thirty more minutes than they would if they had to stop for fast food somewhere else. This is a loss leader. That's the entire concept. Taking your loss in the opportunity cost is still a loss.

emodendroket 8y ago

The article doesn't seem to suggest they're losing money.