Loss Leaders: Why Costco Loses Money on Every $1.50 Hot Dog

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In 2013 Costco CEO Craig Jelinek suggested to co-founder James Sinegal that the quarter-pound hot dog and soda combo, stuck at $1.50 since 1985, might need a price increase. Sinegal cursed him out for even thinking it. The combo loses money every year, as does the $4.99 rotisserie chicken, and that is the design. A loss leader is priced below cost so that the rest of your cart pays for it, and retailers use basket data from millions of receipts to know exactly what else you will buy once you are through the door.

This episode walks through the mechanics: why milk and bananas sit in the far corner of the store, why purchase limits and perishability stop anyone from raiding the bargain, and how the same play scales from British Christmas vegetables to motorcycles in pawn shop windows. It also covers the hardware version of the trap, where printers, game consoles, and power drills are sold cheap so that ink, games, and proprietary batteries can earn the money back.

• In the UK Christmas price war, Tesco, Asda, Sainsbury's, and Morrisons have cut seasonal vegetables to 8 pence per kilogram, against a usual price near 70 pence, to win the holiday shop from Aldi and Lidl.
• In 1959 the British Motor Corporation priced the basic Mini at 496 pounds, losing roughly 30 pounds a car, and expected buyers to trade up to the 537 pound Deluxe. They bought the stripped model in droves.
• American car dealers stay inside bait-and-switch law by tying an advertised low price to one vehicle identified by its VIN, which sells almost at once.
• Printer makers embed chips in ink cartridges so the firmware rejects cheap third-party refills, locking buyers into the product that carries the profit.
• In the 1970s Warner and Reprise sold double-LP samplers openly named Loss Leaders for two dollars by mail, hoping listeners would then buy full-price albums.