Travel & Tourism Technology Trends

The concept of a loss leader is nothing new. Businesses have been using loss leaders for ages, products that are sold at cost or below cost in order to stimulate other sales. For retailers, this often means selling something at a great discount in the hopes that the customer will buy other (higher margin) items while they wonder around your store.  Restaurants have been successful at using loss leaders by providing discounts or even free entrees in the hopes that customers will spend the savings on higher margin alcohol and deserts.

But do loss leaders work for tours and activities? First of all, when you only sell one or two services (as is the case for most tourism operators) you can’t really give away something at cost or less than cost without seriously affecting your bottom line.  To put things into context, here are some characteristics of loss leaders:

A loss leader may be placed in an inconvenient part of the store, so that purchasers must walk past other goods which have higher profit margins.

A loss leader is usually a product that customers purchase frequently—thus they are aware of its usual price and that a lower price is a bargain.

Loss leaders are often scarce, to discourage stockpiling. The seller must use this technique regularly if he expects his customers to come back.

The retailer will often limit how much a customer can buy.

Some loss leader items are perishable, and thus can’t be stockpiled

So, based on these characteristics, here are some of the reasons why I see the concept of a loss leader not working particularly well for tourism based products:

• Tours and activities are purchased using a Groupon are generally very specific services that have little or no opportunities for upgrades.
• Tourism products are generally not purchased frequently by the same customers.  You probably won’t go on another guided tour of Paris. Unless you frequent Paris, and if you do, you still probably wouldn’t take the same tour again.
• Because tourism products are generally not purchased on a repeat basis, there is very little opportunity to know or appreciate the true value of a service.  When you discount your primary service, you potentially erode the perceived value of the service as well.
• Loss leaders are scarce, but so is the tour operators inventory.  Everything is perishable.
• Customers generally only buy one seat for each passenger.  A traveler isn’t likely to come in and buy up all the seats on a van tour because they’re a great price.

Groupon is a loss leader marketplace.  It is designed to drive consumers through your door and bring you more business.  That’s great if you can up sell them into buying something else at regular price, but if you only offer seats on your tour and you’re selling them at 60% off your regular price, you’re probably losing money.

Don’t get me wrong, Groupon has proven to be very good at driving traffic to businesses like restaurants and retail outlets, but these are businesses who can generate revenues through other services or product sales.  If the goal is to drive more local traffic to your tour or activity, consider using friends and family promotion or a “Locals Only” deal.  If you are still considering a Groupon, make sure you take into account all the costs and ask yourself if the added short term traffic will have the long term marketing effect you hope.

Photo credit: http://www.flickr.com/photos/timparkinson/930660427/sizes/l/

Sources: http://en.wikipedia.org/wiki/Loss_leader