Loss leader pricing is a business strategy that can perform several functions. Examples of loss leaders include selling low-cost computer printers that need expensive ink, and discounting hot dog buns by a grocer who then raises the price of hot dogs. For a loss-leader strategy to work, the profits from other goods sold during your loss-leader promotion must cover the low profits or losses taken on the featured merchandise.
You can see loss-leader pricing strategy in Labor Day sales at department stores. Faced with a changing season and the need to attract customers shopping for back-to-school clothes, department stores advertise discounts on summer clothes, back yard barbecue cooking and table wares to make way for the accumulation of fall and winter holiday shopping merchandise. When Apple reduces the prices on its latest products, savvy Apple watchers know a new release is just around the corner. And in September, the traditional time for new vehicle models, dealers announce price cuts on last year’s models. The attractive deals on older cars creates traffic for the latest ones as well.
Loss leader pricing attract customers to stores. However, when a customer comes into a store, he’s likely to see other things to buy. The loss leader strategy involves linking the attractive sale items with other needed or desired goods in a way that’s meaningful to the customer. For example, an electronics retailer once offered video recorders and tapes at a discount, and also sold high-margin projection television sets. Even e-commerce makes effective use of loss-leader pricing to attract customers. The next time you visit a website to take advantage of a discount on shoes, notice the “customers also looked at these products” messages showing other shoes and accessories you might find attractive. The right-hand margin might also display tempting merchandise that are the result of merchandizing studies into the psychology of buying habits.
Building your brand as a local low-cost provider of certain goods involves repeated offerings of hot deals on merchandize that your competitors cannot offer. Your target customer learns to automatically shop first at your store. Warehouse discounter Costco provides discounted gasoline at some of its stores, discounted tires and special purchases inside the store that represent significant cost savings. On the other hand, if you bring along a calculator when shopping there, you will find many of their regular items are not discounted below the prices available at other stores. The great price deals bring people to Costco to do all their shopping and load up the cart. Supermarkets and grocery stores employ the same tactic as the retail giants to attract customers. Computerized inventory management helps them manage pricing on thousands of items, literally from soup to nuts, offering deals on milk, eggs and other staples, while maintaining stronger profits on other items.
A big problem for retailers is knowing how effective their ad spending is in attracting customers. Repeatedly monitoring the results of customer visits is one way to tell if your ads are reaching your target market. This is most easily done by advertising a loss-leader product at a price that will certainly attract customers. Coupled with a coupon that can be traced to a particular newspaper, or neighborhood flier, shows how well your ads are targeting by the amount of merchandise that is sold. In the online world, promotional codes can help you track the effectiveness of affiliates and other relationships. Groupon and similar promoters also offer ways to track your online deals, so you can justify your promotional expenses with hard sales numbers.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for “Digital Coast Reporter” and “Developments Magazine.” She holds a Bachelor of Arts in public administration from the University of California at Berkeley.
How Does Costco Keep their Chickens so Cheap? (Loss Leaders Explained)
Loss leader pricing examples
Loss leader pricing is a popular strategy you can use to attract customers and increase overall sales. Here are some examples of loss leader pricing:
Gaming consoles are popular loss leaders, especially when they are new. They are usually in high demand and have many high-profit items to buy with them. When you make a gaming console a loss leader, some of the items you can up-sell to customers include:
Grocery store essentials
In grocery stores, you can use products like meat, eggs, bread and milk as loss leaders because they are extremely popular. Many people know what these items usually cost and will be excited to save money on these essentials. These are also products that people usually buy with other items—customers will want vegetables to eat with their meat, cereal to go with their milk and sandwich fillings for their bread.
These products are typically placed so that shoppers must pass other items they may need. They might also be marketed as part of a recipe, inspiring shoppers to purchase other products. These kinds of items make good loss leaders because they are perishable and likely to sell more quickly when they are on sale.
Hardware and tools
Large power tools make great loss leaders because they often have many accessories that customers can buy with them. These extra items are often impulse purchases and include storage cases, bits, stands and blades. Many customers also buy other items they need for projects, like wood, stains and gardening supplies.
Printers are another example of loss leader pricing because your customers may also buy ink, copy paper and stationery to use with them. You can also market printers with photo paper, other computer accessories and document or image editing software.
What is loss leader pricing?
Loss leader pricing is when you price a popular item below its minimum profit margin, and sometimes below cost, so that you can gain a larger overall profit from other items customers will buy. The leader is usually an item your customers regularly buy that helps draw them into the store. The goal is for people to buy the leader as well as other items with much higher profit margins, either through store positioning, advertising or the nature of the products.
Loss leaders are often heavily advertised to attract customer attention. Customers are drawn to your store because they regularly buy the item or the product is very popular, so they can tell they are getting a great deal. You can place loss leaders in the back of the store so that shoppers have to pass many other products to reach the sale. You might also merchandise the loss leader on a flashy display with accessories or other related products nearby to entice customers to purchase other higher-profit items as well.
Benefits of loss leader pricing
Loss leader pricing is a popular strategy in retail. Here are some of the benefits of using loss leader pricing:
You can use loss leader pricing to entice customers to visit your store. Sale prices attract customers, and you can build a reputation for having great deals. You can also use loss leader pricing to sell items that are new to the market—shoppers are often more willing to try a new product when its on sale.
You can use loss leader pricing to promote other items in your store. You can do this by arranging stunning merchandising displays or placing them so that customers can see the other products you offer. You can also train your employees to offer complementary items, like boots to go with a fall coat.
Sell excess inventory
Loss leader pricing can help you sell inventory that has been sitting for longer than you expected. Selling your excess inventory at a discount can lower your inventory costs while attracting customers to your shop.
You can use loss leader pricing to help you track how well you are reaching your customers. When you advertise a loss leader sale, you can easily determine how many shoppers are buying the loss leader based on your ads. You can use this information to determine if you need to change your advertising strategy.
Disadvantages of loss leader pricing
Though loss leader pricing comes with many potential benefits, this marketing strategy can also have several possible disadvantages. Loss leader pricing can:
Lower brand perception
Some customers may view deep discounts or low prices as a reflection of the products quality. If your customers feel that the item is too inexpensive, they might believe it is of low quality. You may want to consider how often you are using this strategy and how steeply you are discounting your loss leaders.
Be a complete loss
If your customers do not buy regularly priced items, you will not make up for the loss. Loss leaders should incentivize shoppers to buy other products so that you make a greater overall profit. You can prevent this downside by strategically choosing what products you use as loss leaders and marketing them with high-profit items.
Lower customer frequency
Your customers might wait to buy products until they are on sale if you use loss leader pricing too often. This purchasing logic is similar to buying swimsuits in the fall or waiting until after a holiday to stock up on decorations. Customers may not shop with your company as often if they are waiting for steep sales, which can impact their customer lifetime value. Carefully evaluate how often you use loss leader pricing and whether you are training your customers to wait for discounts.