Loss leading with free puncture repairs

Driving to work this morning, I saw an advertisement on the back of a bus for free puncture repairs from Top Town Wheel and Tyre in Te Rapa. Why would a tyre retailer offer to fix punctures for free? As I note in my ECONS101 class, when we see an interesting pricing strategy in the real world, it is likely that it is a strategy that is working for the firm.

In this case, the free puncture repair offer is an example of loss leading, which I discussed with my ECONS101 class a couple of weeks ago. Loss leading happens when a firm sells some of their goods or services intentionally at a loss, in order to encourage more customers to visit them, with the goal of getting those customers to buy other goods and services that the firm can profit from. Offering free puncture repairs, which costs the retailer some staff time and some consumables, will make a loss.

What is the tyre retailer hoping to profit from? Once a customer arrives at Top Town with their punctured tyre looking for a repair, Top Town can easily up-sell the customer to a replacement tyre (which is not free) if the puncture cannot be repaired. That is probably the case fairly often (in my experience, more than half the time when I go to get a puncture repaired, the tyre has been damaged beyond repair). Top Town then profits from the replacement tyre, which they wouldn't have sold if the customer hadn't been encouraged (by the free puncture repair offer) to go to Top Town in the first place.

There is also a soft form of customer lock-in at work here too. Having discovered that their puncture cannot be repaired, the customer could go to a different tyre retailer to get a replacement tyre. However, that involves some additional hassle, time, and effort. Why go somewhere else, when they are already at a tyre retailer? In other words, there is a switching cost here - the additional time and effort required to find and travel to a different tyre retailer represents the cost of switching to an alternative seller. That switching cost, however minor, may lock many customers into buying their replacement tyre from Top Town, rather than going somewhere else. By doing so, they avoid the switching cost.

So, offering free puncture repairs is a smart pricing strategy for Top Town, which likely increases their profits. The surprising thing may be that every tyre retailer doesn't do the same.