A loss leader is a product or service that is sold at a relatively unprofitable price in order to generate other sales. This is a common pricing strategy that has many variations as follows.
Location TrafficLoss 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 DoorFoot 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 LaunchA 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 ChecksIt 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 SupplyAnother 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 PriceA 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.
CollectablesCampaigns 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-onsOffering 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 MealsIt is common for restaurants to offer kids meals that are low margin in order to sell to the parents.
SamplesSelling 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 PricingSelling 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 & BladesSelling 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.
NotesPlease check the laws regarding pricing in your jurisdiction as some loss leader pricing strategies may be prohibited in your area.
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