Blog 58: Loss Leaders by Xavier Lo, FIA, FRM, MBA

Let me start today’s blog with a question: why do you think companies sell new products? Obviously to make money right? Well, not always – today’s blog is about Loss Leaders [蝕本產品], and this is a pricing strategy [定價策略] that companies often use, and possibly something you’ve come across too.

By definition, Loss Leaders are products which are priced to cheaply that it might cause companies to lose money [蝕錢] by selling it. So what’s the point? Well, some companies want to gain market share [市場佔有率] and customers [客], so the way to do this is to make a product so cheap that the price attracts the customers. This is done with the hope that the customer buys other things along the way. Think about supermarkets, they sometimes have staple items [必需品] which are very cheap, and the idea is that customers buy other items like snacks while shopping. Nespresso [奈斯派索] and Microsoft [微軟] have also done this by selling their coffee machines and XBOX consoles at a very low price, as the customers will spend a lot more on coffee capsules and video games.

Insurance companies also do this. In the non-life space, you might be aware that motor insurance [汽車保] is not a very profitable segment. In that case, why do so many companies still sell motor insurance? The reason is because the insurance agents [保險經紀] are hoping that you’ll find it convenient to also buy other products, like home insurance [家居保] or travel insurance [旅遊保], from the same company. Some companies even use their non-life products to cross-sell life and health insurance. Another way to do this is to package Loss Leaders with other more profitable products and sell it as a bundle.

We actuaries are not sales people naturally, but being aware of these sales strategies are important. With the ever changing world, you might be asked to work on a sales pitch one day, and when that happens, remember the Loss Leader!