Client profitability - part 2, Loss Leaders
Excerpt from 'How to Wrestle an Octopus: an agency account manager's guide to pretty much everything'. Available now!
What is a loss leader?
There are times when ‘loss’ (low, zero, or negative profit) is the aim rather than a healthy profit. These clients (or projects) are called ‘loss leaders’.
In a retail sense, a loss leader would be a product that vendors use to entice customers into a store where they hope the customer will purchase other items at the same time as the loss leader. They do this in the hope that the profit made on the combined purchase will be a healthy one. The item would usually be offered at a price below the minimum profit margin, not necessarily below cost.
In an agency sense, loss leaders are clients or projects that are intentionally run below the ideal profit margin. Using a loss leader can be a legitimate addition to an agency’s marketing strategy, never-the-less, you would still need a mighty good reason to keep working with a client that brings in little-to-no profit for your agency. In cases such as these the trade-off will be something other than immediate monetary gain, and could include:
- Altruism. The client may be a charity or not-for-profit organisation that has close association with someone in your agency, or that will add a feel-good factor to your client list.
- Bait. The prestige of having a loss-leading top-tier client on your agency’s list can help net other, more profitable clients.
- Bragging rights. The love of rubbing shoulders with the rich or famous extends to agency owners and managers too.
- F.O.D. The client is an ‘FOD' (a.k.a ‘Friend of Director’, or ‘mate helping mate’).
- Speculation. Helping a loss-leading client now may ensure they stay with your agency when they are more successful in the future.
Loss leading components
At times only a portion of the work your agency does for a client will be loss-leading. Most times this type of loss leading is designed to be ‘bait’ to get your client to spend more, or to try more of your agency’s services, or to make your agency/client relationship more ‘sticky’. Here are some examples:
- You may offer your client use of a DAM (digital asset management) system for free if they spend over $100,000 per year with your agency.
- You offer to store your client’s print collateral for free if they put all of their print and logistics work through your agency.
- You take a hit on the cost of TVC production if you can secure the rest of the campaign and media buy.
Whatever the reason you choose to work with loss leaders, you need to diligently work the numbers. Otherwise, there is a danger of setting a pricing precedent that cannot easily be reversed if things do not work out as planned.
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