A loss leader pricing strategy, a term common in marketing, refers to an aggressive pricing strategy in which a store prices its goods below cost to stimulate sales of other, profitable goods. With such a pricing strategy, a business is selling its goods at a loss to lure customer traffic away from competitors. In contrast to predatory pricing, loss leader pricing is aimed toward stimulating other sales of more profitable goods.
What Is a Loss Leader Strategy?
A loss leader strategy involves selling a product or service at a price that is not profitable but is sold to attract new customers or to sell additional products and services to those customers. Loss leading is a common practice when a business first enters a market. A loss leader introduces new customers to a service or product in the hopes of building a customer base and securing future recurring revenue.
Understanding a Loss Leader Strategy
Loss leading can be a successful strategy if executed properly. A classic example is razor blades. Gillette, for example, often gives their razor units away for free or at a low price, knowing that customers must buy replacement blades, which is where the company makes its profit.1
Another example is Microsoft’s Xbox One video game console. The product was sold at a low margin per unit, but Microsoft knew that there was potential to profit from the sale of video games with higher margins and subscriptions to the company’s Xbox Live service. The loss leader strategy is common throughout the video game industry and, in most cases, consoles are sold for less than they cost to build.
The loss leader strategy is also known as penetration pricing as the manufacturer attempts to penetrate the market by pricing its products low.
Opponents of loss leader pricing practices argue that the strategy is predatory in nature and designed to force competitors out of business.
Loss Leaders and Retail Shops
Both brick-and-mortar stores and online shops use loss leader pricing strategies. These businesses frequently price a few items so low that there is no profit margin. The hope is that once the shopper buys the product from the store or the website, the shopper will buy other products and become loyal to the brand. Unfortunately, for business owners, consumers sometimes leave without buying other products or subscribing to the brand. This consumer practice of jumping from shop to shop and picking up loss leader items is called cherry picking.
Some retailers place loss leaders at the back of their stores so consumers will have to walk by other, more expensive products to get to them. One of the most practiced examples of this is the sale of milk. Milk, a common household item, is often placed at the back of every grocery store, requiring an individual to pass by almost every other item in a grocery store.
Even if the shopper just came in the store to buy milk, it is very likely they will purchase additional items as they walk by them on their way to the milk section and then back to the register, resulting in increased sales for the shop.
Examples of Loss Leader Strategy
- Supermarkets & Retail Stores: Selling milk, bread, or eggs at a loss to attract shoppers who will buy other groceries.
- Gaming Consoles: Companies like Sony and Microsoft sell PlayStation or Xbox at a lower price, but make profits on games and accessories.
- Printers & Razors: The printer or razor is cheap, but ink cartridges or razor blades are expensive, ensuring long-term profits.
- E-commerce & Subscriptions: Amazon offers cheap Kindle devices but earns money through e-books and subscriptions.
FAQs
What is a Loss Leader Strategy?
A Loss Leader Strategy is a pricing technique where a business sells a product at a loss (below cost price) to attract customers, with the expectation that they will purchase other profitable products or services.
Does the Loss Leader Strategy always work?
- Customers only buy the discounted item without purchasing anything else.
- Competitors match or beat the price, reducing the strategy’s impact.
- The business suffers heavy losses without gaining enough profitable sales.