A loss leader is a product or service that is sold at a price below its cost in order to generate other sales. This pricing strategy is commonly used by companies to attract customers and increase overall sales, even if it means selling certain products or services at a loss.
There are several variations of the loss leader strategy, including:
- The “doorbuster” sale, where a company offers a deeply discounted product or service to attract customers to its store or website. This is often used during holiday shopping seasons or other peak times.
- The “bundle” sale, where a company offers a discount on a group of related products or services. This can help customers save money and encourage them to purchase more than they might otherwise.
- The “free trial” offer, where a company provides a limited-time free trial of its product or service in order to encourage customers to try it and potentially become long-term customers.
- The “add-on” sale, where a company offers a discounted or free additional product or service with a purchase. This can help the company upsell to customers and increase overall sales.
Overall, the loss leader strategy is a common pricing tactic that can be effective in attracting customers and generating additional sales. However, it is important for companies to carefully consider the potential risks and benefits of this strategy and ensure that it is aligned with their overall business goals and objectives. Here are more examples.
Location Traffic
Loss leaders are commonly used to drive customer traffic to a location. For example, a drug store that sells tissue paper at an unusually low price in order to get customers in the store whereby they may purchase other items.
Foot in the Door
Foot in the door is a classic sales strategy whereby you establish an initial relationship with the customer by giving them a good deal. This relationship is then leveraged to sell more. For example, an IT consulting company that takes on a project at low cost at a large bank in order to greatly expand their relationship with the bank over time.
Business Launch
A loss leader can be used to launch a new business or product. For example, a new ecommerce seller who has no ratings on their profile could sell a popular item at the best price on the platform in order to more quickly establish a reputation.
Rain Checks
It can be perceived as false advertising to offer a loss leader but then run out of stock. In order to address this potential compliance and reputational issue, retailers may offer rain checks that allow the customer to obtain the offer at a later date.
Limited Supply
Another way to avoid perceptions of false advertising is to specifically list how many units of a loss leader will be available in your promotional materials. For example, an electronics store that will offer a low cost mobile device to the first 50 customers to claim the offer.
Everyday Low Price
A loss leader can be an everyday low price whereby customers know that you have the best price for some item. This is usually a fast moving consumer good that is popular such that it has the power to generate sustained traffic over time. For example, a coffee chain with unusually cheap coffee that makes most of its profits from things that people buy with their coffee such as donuts.
Collectables
Campaigns that offer a different collectable each day or week in order to drive regular traffic. For example, a gas station that offers collectable items related to a popular summer movie at a very low price.
Add-ons
Offering the loss leader as an add-on such that you must purchase something else in order to qualify. For example, a collectable poster that is only available to people who see a movie.
Kids Meals
It is common for restaurants to offer kids meals that are low margin in order to sell to the parents.
Samples
Selling samples at a low price in order to give customers experience of your products. For example, in the 1970s it was common for record labels to sell compilation records at a low price in order to promote various artists.
Predatory Pricing
Selling below cost or below a reasonable margin can be considered an anti-competitive practice in some situations. For example, a large retail chain that offers dry cleaning services below cost in order to put local dry cleaners out of business. This may allow them to capture much market share and may be viewed as anti-competitive.
Razors & Blades
Selling a product at a low price that requires regular consumables. For example, selling a printer cheaply that is then very expensive to operate as it requires specialized cartridges.
