Why retailers price some items below cost

If you’ve walked down the milk aisle at the grocery store lately, you may have noticed there were more options to choose from. Kroger, Walmart and Albertsons have started producing their own milk.

That has the dairy industry worried because those chains are pricing their milk so low that they are losing money on it. But why would supermarkets invest so much into creating milk production from the ground up only to sell it below cost?

“By lowering the price for one particular product, you can actually increase the sales of many other products inside your store,” said John Zhang, professor of marketing at the University of Pennsylvania’s Wharton School. He said Thanksgiving turkeys are a big a loss leader. Grocers sell them for pennies per pound while quietly upping the price of all the trimmings.

“When you eat that turkey at a very low price, you feel good,” Zhang said.

Some businesses’ main products are loss leaders. Gas stations don’t make much on gas, but on they do on car washes and fizzy drinks. Car dealerships profit less from vehicle sales than from all the add-ons and financing.

And at the end of the day, even the savviest consumers don’t have the time or energy to break down the costs of every transaction, according to Gerry Smith, a marketing professor at Boston College.

“That kind of cognitive laziness will then turn into loyalty,” he said.

Because we don’t always want to have to search for a good deal. We’d rather walk in for that milk and know we’re getting one.

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