These are products / services a firm sells at cost or below cost, so that it can attract customers who are subsequently sold other products / services. This is a strategy widely used by retail / consumer product companies to gain foot traffic. This is frequently achieved by retail businesses through coupons, sales promotions / advertisements in the local newspapers, etc. Once the customer is in the retail store, he might be tempted to buy other higher margin products, prominently displayed on the retail store's shelves. Please also not the following at the time of this writing (2009):
2. The strategy is not limited to CPG / retailing. High-tech firms are adopting it as well. Recent acquisitions of services firms by high-tech bellwethers like HP and Dell illustrate the point well. These firms now have an option of sweetening the deal either before or after chalking IT strategy. For example, Dell now has an option to provide deeper discounts either up-front (while chalking IT strategy through Perot Systems), followed by selling its Dell Systems at a good profit; or by reversing the pricing: keep charging full-blown strategy consulting pricing, followed by deep discounts on Dell machines vis-a-vis the competition during systems implementation.
For firms like Dell and HP, an effective strategy should involve outsourcing / brain-sourcing. For example, India's IIM graduates can do strategy consulting related number-crunching when it comes to Strategy Consulting T&M (time and material), reducing the pricing for up-front consulting engagements through Perot Systems and EDS, respectively. Further, IT systems implementation, which would require selling the hardware (Dell systems and HP computers respectively) coupled with designing / implementing associated software, can be broken down into products and services. Services can again be implemented through "outsourcing" to countries like India / Russia, which offer cheaper programming options. Thus, these firms will be able to charge full-blown pricing for their products, provided they follow a loss-leader strategy (which can be sweetened by building capabilities like number crunching in off-shore locations using brains equivalent to top-tier MBA talent here), coupled with IT off-shoring. Thus, the value-chain can involve loss-leading strategy consulting, coupled with full-priced products and off-shored services!
Ethical Dilemma: If ramping up in-house off-shoring takes time, these firms can consider what IBM did: it quietly laid off 15,000 employees while hiring the equivalent number in India. Here is the ethical dilemma though: is this socially responsible, when Americans are losing jobs? For that matter, is it socially responsible to provide billions of dollars to bankers in TARP (troubled assets relief program) who have been instrumental in selling liar's loans, which have resulted in 2 million foreclosures so far? To find out more, listen to Sam Mishra's irregular podcasts on the American and Global macro-economy at FRANCONOMICS.COM.