One of the most infamous stories in retail history is a shop that managed to make money selling beans for -2p.
This wholly absurd state of affairs, which culminated in Avon’s Sander Superstore making a surprising profit on giving tins of baked beans away, was the culmination of a period in retail history known as “The Bean Wars”.
This is the most extreme example of a concept in retail economics known as a loss leader, but whilst it seems like a simple strategy, it requires careful retail maintenance and store layouts to make it a viable, successful strategy as opposed to a quick route to bankruptcy.
How Do Loss Leaders Work?
The baked bean price war only happened for two reasons: surprisingly cheap volume baked bean production and the ability to make a profit by selling unprofitable products.
This happens in a lot of different industries and takes the form of a two-step approach that not only attracts new and returning customers but also convinces them to stay in the shop and see the whole value proposition.
The first step is the easy part; sell a desirable product at either a loss or so far beyond its market value that it becomes impossible to ignore.
Whilst with baked beans it reached the ludicrous depths of negative two pence, you can have an expensive product be a loss leader if it still costs less to buy than it does to make, although this is typically only done with products that can be sold with a razor-and-blades model.
Actually making money from this is the more difficult part, and it involves redirecting a customer’s attention away from the product they came in to buy and attracting them with other offers.
The Bean Wars were so successful for supermarkets because the overwhelming majority of customers would decide to do their entire shop there, and even one or two “luxury” items sold for a profit would offset the losses on a tin of beans.
The way they would encourage it is through establishing a retail journey to reach the highly lucrative offer. In most supermarkets but in the 1990s and especially now, everyday essentials are typically located near the back of the shop, after fresh produce, delicatessen stands and outright luxury goods.
Once you reach these cheap products, a customer has either already added other items to your basket or is likely to before they reach the checkouts.
This customer journey means that they will see the vast majority of the products on offer and, even if they are being relatively frugal and careful with finances, might opt to buy butter or cheese or a drink to go with their beans on toast.
Another very famous example in the United States was the Costco Hot Dog, which costs $1.50 (£1.50 in UK locations) and has retained that price for four decades. When asked why the price remained so low, co-founder Jim Sinegal said that it was a talking point that helped bring people to the store.
It is a careful balancing act, and one that can be undermined, rather ironically, by the loss leader product being too good.
The most infamous example of this is the Mini Cooper, first sold by the British Motor Corporation in 1959.
It was just two pounds more than the cheapest car in Britain at the time but was sold at a £30 loss (£585 adjusted for inflation) on every car.
The idea was that people would not buy a basic Mini but would instead opt for optional extras such as carpets, rear windows that opened and heaters starting at a price that was £41 more and would offset the losses.
However, the base Mini was still so much better than many other cars in its class at the time that the basic model sold way more models than intended, ironically leading to significant losses.