Loss leader strategy pricing: definition, guide and examples

By Indeed Editorial Team

Published 26 April 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

There are various pricing strategies you can employ as a manager to boost a company's profitability. Loss leader pricing is one of these strategies that involves reducing the price of an item to increase the sales of other items in your stock. Learning about loss leader strategy can help you increase sales and improve brand visibility. In this article, we define loss leader pricing, provide a guide and examples of this strategy and show the advantages and disadvantages of the concept.

What is loss leader strategy pricing?

Loss leader strategy pricing is valuing an item below its profit margin to encourage customers to also buy other higher-priced items. This usually applies to popular items that people buy together. For example, a business may reduce the price of snack food, knowing that customers may also buy drinks at full price to go with them. This strategy also helps businesses attract customers into the shop where they may find other products and services to buy. Loss leader items introduce new customers to a product to build a customer base and secure the business' future recurring revenue.

An example of this strategy is a company that sells toothpaste giving away their premium product for either a low price or for free, knowing that customers may come back to buy a replacement since they are essential needs. Another example is a company that sells a game console at a low margin per unit because they can make more profit from selling video games and subscriptions to their video game live service.

Related: What is strategy and why is it important in business?

Loss leader strategy and retail shops

Physical shops and online shops use loss leader strategy pricing strategies. They price a few items lower than their profit margins, hoping that once the shopper buys from them, they buy other products and become loyal to the brand. Sometimes customers buy the loss leader item and leave the shop without buying other items. Business owners refer to this practice as cherry-picking.

One strategy some professionals use is placing the loss leader item at the back of the shop so customers view other, more expensive products and develop interest before they get to the item. For example, some retailers place their discounted milk at the back of the supermarket so that people may pass items such as biscuits, cereal and coffee.

Related: What is a good profit margin? (Definition, types and FAQs)

Examples of loss leader strategy pricing

Different businesses may use the loss leader pricing strategy differently, depending on their target audience, customer base and the kinds of products or services they sell. Here are some examples of loss leader strategy pricing:

  • Gaming consoles: These are common loss leaders, especially when it's a new gaming console that's in high demand. By making a gaming console a loss leader, companies might gain back profits from the sale of video games, extra controllers, batteries, headsets and streaming equipment.

  • Food essentials: This includes products like meat, milk, bread and eggs since they are essential. Customers may go to a shop for these necessary items and find other items they also want that may be higher in price.

  • Hardware and tools: Large power tools are often profitable loss leaders because there are several accessories that customers can buy with them. For example, a customer may buy a saw and then buy different sizes of blades.

  • Printers: When customers buy printers, they also buy ink and paper to use with the printers. A business can market printers with photo paper and other computer accessories.

Related: What are pricing strategies and why are they important?

Advantages of strategy pricing

Here are some advantages of loss leader pricing:

Attract customers

The goal of loss leader strategy pricing is to attract customers to visit a shop by offering low prices. If you use this strategy consistently, the business can gain a reputation for having affordable products and services. This may encourage customers to try shopping there who might not have considered it in their price range previously. You can also use this strategy to sell new items since low prices may encourage customers to try them.

Related: 8 customer acquisition strategies to promote business growth

Helps you with cross-promotion

You can use loss leader strategy pricing to promote other products in your shop. To do this, consider putting these items together in the shop so that, when customers see the loss leader items, they also see the products you're offering. For example, you may move items that have a reduced price to a new location where customers may see items with higher prices that they might not have considered in the original item location. You may also train staff to offer complementary items to customers when they make a purchase.

Enables you to sell excess inventory

Another advantage of this type of strategy is that it can help you sell excess inventory. If you have an item that has been in the shop or in storage longer than other items, you can use the loss leader strategy by selling those excess items at a discount to attract customers to your shop. This can help you increase revenue and allocate more space for new products. Consider reviewing inventory to identify items you can use as part of your loss leader strategy.

Related: A guide to inventory manager responsibilities (plus salary)

Allows you to track advertising

You can track how well advertising is performing with loss leader strategy pricing. For example, when you advertise a loss leader sale, you can find out how many shoppers responded by buying the loss lead item and whether other sales increased. This helps you assess how well advertisements are reaching and impacting customers. You can use this insight to develop or improve marketing strategies.

Related: Marketing vs PR: key differences and 10 career options

Teaches you about customers

Using this strategy may also help you understand customers' buying habits and what products attract them. For example, you may keep a record of which additional items people bought with the loss leader item. This can help you determine what items you may cross-sell in the future and which discounts attract new customers or encourage repeat business.

Related: How to conduct a consumer analysis (a step-by-step guide)

Disadvantages of a loss leader strategy

The main disadvantage of the loss leader strategy is that customers might only buy the loss leader item without also buying other higher-priced items or browsing the shop. Additional disadvantages of loss leader strategy include:

Lowers quality perception

Some consumers may feel deep discounts or reduced prices reflect the quality of the product or service. This can lead customers to consider competitor options with higher prices. You can adapt to this obstacle by emphasising the quality of the product or service or comparing it to competitors' offerings. For example, you may add a description to a sale letting customers know that you're selling an item that's identical to a competitor's item but at a lower cost.

Related: What is promotional pricing? (With advantages and examples)

Decreases customer frequency

If customers know that you often put your products on sale, they might wait until you have a product on sale before they buy them. Assess how often you use loss leader pricing and be sure that it's not becoming the standard. This may cause customers to expect a lower price every time. You may instead use the loss leader strategy during certain holidays or events. For example, you might limit the strategy to a time when you know customers buy certain items together.

Related: How to find and calculate frequency (with examples)

Leads to excess

If you use this strategy, you may order a larger amount than usual of the loss leader items and those you plan to sell with it. This can lead to excess if customers don't buy out the stock or pair them the way you expected. For example, if you use hats as a loss leader item to encourage customers to buy more coats and gloves, customers may buy more hats and coats while not buying gloves. Since this is a seasonal item, the business may have an excess of gloves that take up space in the warehouse. To avoid this challenge, you can use historical buying patterns to determine how much you can order.

Related: Guide to buying behaviour: types, tips and influences

Tips for implementing this strategy

Here are some tips you can consider when implementing the loss leader strategy:

  • conduct a risk assessment for a business before implementing the strategy

  • review the laws regarding this strategy in the area where the business is to be

  • keep track of the rate at which customers purchase the additional products

  • make plans to balance regular discounts and shop prices to avoid only engaging customers with deals

  • send a survey to customers to determine which items they buy most frequently and what they buy together

  • consider having annual events where this strategy is primary

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