Monday Memo

A Byte of Knowledge

When you're new to the game, there are two types of people you can follow:

Farmers and prospectors.

Farmers are the steady, disciplined folks. They plan, they plant, they harvest. Day in, day out. It's not always glamorous, but it works.

Prospectors? They're always chasing the next big gold rush. And a few might strike it rich...

But most of the time, they end up with nothing but empty pockets and broken dreams.

When you're just starting out, you should be modeling the farmers.

Every. Single. Time.

Why?

Because their success is built on proven strategies. It's reliable. Predictable. You can actually replicate it. 

Sure, the rare prospector who hits the jackpot looks sexier. But it's a crapshoot.

So if you're just starting out, be the farmer. Use proven strategies. Work hard. Stay disciplined. It might not be as exciting as striking gold overnight, but trust us...

It's how you build real, lasting success.

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Something to Ponder

You ever notice how some folks always seem to find a problem, no matter what solution you offer?

There's a saying that goes, "Losers have a problem for every solution."

We bring this up...

Because in this new AI-driven world, we're seeing new technologies, companies, and tools pop up left and right.

But for every groundbreaking solution, there's always someone ready to point out what's wrong with it...or why it doesn't work.

"Oh, but AI-generated copy sounds robotic..."
"Yeah, but what about job losses?"
"Sure, but it'll never replace human creativity..."

Sound familiar?

Here's the thing, though...

The real winners in the AI revolution will NOT be the cynics and malcontents.

They'll be the ones asking, "How can I use this to my advantage?"

So, let us ask you this...

Are you sitting on the sidelines, listing off excuses?

Or are you in the game, figuring out how to use AI to grow your business and make more money?

We Asked – AI Answered

Our Question: 

"Costco is famous for their $4.99 rotisserie chickens - a price unchanged since 2009. In 2019, the company sold 91 million rotisserie chickens. But they actually LOST an estimated $30-$40 million.

What's the business logic behind intentionally taking this loss?"

ChatGPT's Answer:

This is what's known as a "loss leader". Which is a pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services. Let's dive into business model:

1. Costco's Rotisserie Chicken Strategy

a) Customer Traffic:

The rotisserie chickens act as a powerful magnet, drawing customers into Costco stores. This strategy is based on the concept of "destination items" in retail psychology. According to a study by the International Journal of Retail & Distribution Management, destination items can increase store traffic by up to 30%.

b) Perception of Value:

The low-priced chickens reinforce Costco's image as a place for good deals.

In retail, this translates to customers perceiving the entire store as offering good value based on the prices of a few key items. A study published in the Journal of Consumer Research found that stores known for good deals on a few items were perceived as less expensive overall, even when their average prices were higher than competitors.

c) Customer Loyalty:

Consistent pricing builds trust and loyalty among customers. According to a study by Harvard Business Review, increasing customer retention rates by just 5% can increase profits by 25% to 95%. In Costco's case, loyal customers are more likely to renew their Costco memberships, which is crucial to their business model.

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2. The Door-in-the-Face Technique

This psychological principle, studied by Robert Cialdini and Vincent, suggests that customers are more likely to make larger purchases after committing to a small one. In Costco's case, the rotisserie chicken serves as the small commitment that gets customers in the door.

A study published in the Journal of Personality and Social Psychology found that this technique can increase compliance with larger requests by up to 40%. In a retail context, this translates to customers being more likely to make additional, higher-priced purchases after committing to buying the low-cost chicken.

3. Impact on Overall Revenue

a) Increased Foot Traffic:

A study by the National Retail Federation found that 71% of shoppers who enter a store to buy a specific item end up purchasing additional products. This statistic highlights the importance of Costco's strategy to draw customers in with the rotisserie chicken.

b) Higher Average Transaction Value:

Research by marketing professor Dinesh Gauri showed that loss leader promotions can increase basket size by up to 25%. This means that while Costco may lose money on the chicken itself, the strategy leads to significantly larger overall purchases.

4. Costco's Specific Approach

a) Vertical Integration:

In 2019, Costco opened a $450 million poultry processing plant in Nebraska. This move towards vertical integration allows them to control costs and maintain the $4.99 price point. According to a report by CoBank, this plant is expected to process 100 million chickens annually, covering about 40% of Costco's needs.

b) Store Layout:

Rotisserie chickens are strategically placed at the back of the store. This layout, studied by consumer behavior expert Paco Underhill, encourages customers to walk through the entire store, increasing the likelihood of additional purchases.

c) Membership Model:

Costco's primary profit comes from membership fees, not product sales. According to Costco's 2020 annual report, membership fees accounted for about 2% of Costco's total revenues but made up around 70% of its operating income.

Loss leaders like rotisserie chickens help maintain high renewal rates (currently around 90%). A study by the research firm Magid found that membership renewal intent is strongly correlated with the perception of value, which is reinforced by consistently low prices on key items like the rotisserie chicken.

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Until next time!

The AI Marketers

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