In a recent conversation with my son, he observed that New York’s MTA charges $2.75 for each subway ride, but the options for card refills are generally not divisible by that amount. In his view, this practice is not very customer-friendly and is likely harmful to the business. I agreed it is not customer-friendly, but I suspect it does improve the MTA’s financials. More importantly, it reminded me of the principles behind non-core pricing, or long-tail pricing.
We have all heard the term “loss leader”, and we have all heard someone say, “We’ll make it up on volume.” Most people don’t think about it much, even when we see advertisements indicating a company is selling below cost. During some recent conversations I was asked when, if ever, it makes sense to sell something at a loss. My quick answer was – rarely, but there are occasions when it is a good idea to sell below your cost.