By Stu Woo

Business students learn about the concept of a loss leader: a product a store sells at a loss, to bait shoppers into buying something profitable.

For decades, there was no better example than Costco's $1.50 hot dog-and-soda combo, a deal so legendary that it sells 130 million a year.

But across the Pacific, a new king has emerged. It is a towering, soft-serve ice cream cone that typically costs 40 cents -- and customers buy about 700 million a year.

The company behind the cone, Mixue Ice Cream & Tea, recently surpassed McDonald's as the world's largest fast-food chain by store locations, mostly in Asia. It did so by perfecting the modern science of making money by losing money.

Pronounced ME-schway, the Chinese chain didn't just copy Costco's playbook. Instead, it took three strategies that Costco uses with its hot dog and added some twists. Like Costco, it could pull it off because it mastered supply-chain efficiency at a huge scale, as it demonstrated with its recent surge in profit.

Here's what Mixue did.

1) High-low pricing

A classic version of the loss leader is high-low pricing: Price a product at a loss and stick it in the back of the store if possible. Costco does this with its other famous loss leader, the $4.99 rotisserie chicken.

"Chances are you're going to pick up other items in the store while you're going to buy that loss leader, and usually those other items are priced at a higher margin," said Barbara Kahn, a Wharton School marketing professor.

Mixue stores, often small stands, can't funnel customers through a shopping maze. Instead, they stick the ice cream on top of the menu, followed by about 35 profitable items.

The cone costs around 40 cents in much of Asia and more in wealthy nations such as Australia and Singapore. In Hanoi, the cone goes for 10,000 Vietnamese dong, or 38 cents. But want to upgrade to a sundae by adding syrup and fruit? That is 95 cents.

Though Mixue calls the cone its signature item, it sells many more drinks -- more than seven billion last year. Those typically cost closer to a dollar.

Before Do Thu-Thuy opened a Mixue franchise in Hanoi, she said her brother asked: "When do you think you'll ever break even from selling 10,000-dong ice cream cones?" Her response: The cone attracts customers and other products rake in profit.

2) Signaling other bargains

Conventional thinking behind loss leaders centered on high-low pricing. But a 2014 paper from economists Younghwan In and Julian Wright added another wrinkle on how a loss leader might work.

Their idea: A company advertises a low-price product to signal that upgraded items in the same category are also a good buy.

They considered stores that sold a product below cost but also offered a profitable upgraded version -- like Mixue's 95-cent sundae. Their analysis was that consumers consider the upgraded item as much of a bargain as the loss leader.

While there is no easy upgrade to Costco's hot dog or chicken, the retailer has said its famous bargains build its image of affordability.

"We've been able to stave off inflation on things like the hot dog pricing at $1.50 and the rotisserie chicken at $4.99," said Costco finance chief Gary Millerchip last year, "and generally demonstrating the way that we're lowering prices for members wherever we can."

3) Free media

As Canadians dealt with inflation in 2011, Costco's hot dog combo remained a steal at 2 Canadian dollars, equivalent to roughly $2 at the time. Then the retailer shocked the country by dropping the price to C$1.50.

"Clearly that impacted the bottom line negatively," said Costco's then-finance chief Richard Galanti. But he said it paid off not only via increased foot traffic, but also because "we got national attention of being the only game in town that is lowering the prices on anything."

The attention isn't technically free. Stores lose money on each loss leader sold. But Mixue offsets that on social media, where Tiktokers film themselves being impressed by the price of the cone they are licking.

That makes Mixue's cone the perfect loss leader, said Kahn, the marketing professor. Not only does it look great on social media, but it is also a treat that signals happiness. "What's more enjoyable than an ice cream cone?" she said.

Write to Stu Woo at Stu.Woo@wsj.com

(END) Dow Jones Newswires

August 31, 2025 23:00 ET (03:00 GMT)

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