​Defining loss leaders in business

In business, a loss leader refers to a product or service sold below its market or wholesale price. Companies use loss leaders to attract customers to more expensive products, enhance customer loyalty and increase future sales.

​What is a loss leader strategy example?

Businesses sell products that are manufactured or bought at a certain price. Charging a customer a certain percentage above that buy price yields a profit on that item. However, if you have a popular item that you bought for $5, you may price it at $4.95 because, as a popular item, it will bring people to your storefront.

In some cases, you can price it a bit above cost and still have it be a loss leader. It depends on your pricing strategy. The bottom line is that most examples of loss leaders boil down to one goal: more customer traffic.

​Fundamental loss leader pricing models

There are two fundamental models that businesses use to get more loss leader traffic:

​Discount model

Many retailers use the discount model. One popular discount tactic is the BOGO (buy one, get one). For example, let’s say you have an item that you price at $10 but decide to pair it with another item also priced for $10 but with a twist.

You could sell it as a BOGO half-off, which means one item is full price, while the other is 50% less. The other option would be to do BOGO free, which would mean the second item is free. Depending on your purchase price, you could make a thin profit on volume, based on how you calculate your profit margin.

​Coupon model

The coupon model works best for items with minimal or zero marginal cost. Retailers give credit that can be used for other purchases. For example, each time someone makes a purchase, a percentage of their spending is credited back to their customer account. This type of loss leader pricing example is popular with customer loyalty programs.

​Brick-and-mortar loss leader examples

When it comes to brick-and-mortar retail stores, more foot traffic increases revenue potential. For them, implementing a loss leader strategy makes sense, but it’s a matter of timing and product among other factors.

Here are some examples of in-store loss leaders in action:

Black Friday deals

On the Friday after Thanksgiving in the U.S., companies offer products or services at a fraction of the cost. These door-buster deals, as they’re called, are designed to lull and lure customers into increasing their shopping volume, which includes high-ticket items. Approximately 45% of shoppers are enticed by discounts of 50% or higher.

​Grocery store samples

Customers who enjoy grocery store samples may be enticed to purchase the full product. Grocery stores may also increase the temptation by offering a discount or coupon item. For example, customers who buy and show a receipt can receive a special deal, warming them to the idea of making an additional purchase.

​Milk and egg sales

If you’ve ever noticed just how far you have to travel in the grocery store to get milk and eggs, know it’s not your imagination. There’s a concerted effort by grocery stores to create layouts that entice more sales. Milk and eggs are stored in a refrigerated section at the far back of a store and are often used as loss leaders.

On the way to those staple items and to the checkout, customers usually make additional purchases. Because they’re so effective, milk and eggs can be used as loss leaders, even without a steep discount.

​Inkjet printers

Inkjet printers are a great example of a loss leader pricing strategy. They’re often sold at a low price with ink included. In some cases, the ink is a sample, so it runs out far quicker than regular ink. This attracts ink buyers who will need to purchase more expensive replacement cartridges regularly.

​Razors

Consumable products, such as razor blades, are often used as loss leaders. Some companies sell razor units at a discounted price below the profit margin since they know customers will need regular replacement razor blades. Razors are also used as loss leaders when companies sell a razor with extra blades as a package deal. This can attract customers to make a purchase from the same brand in the future. When customers need refills, however, the price of the product will be substantially higher.

​Online stores loss leader pricing strategies

For online stores, loss leaders are all about increasing shopping cart items. Amazon is a loss leader strategy masterclass. The company has used its Kindle to make money on e-books, as well as its prime memberships with all the benefits to entice people to add a few more items to the shopping cart. Walmart is another brand that thrives on this strategy, as it’s known for offering deep discounts both in-store and online.

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​Advantages of loss leaders

Here are some of the advantages of promoting loss leaders:

• Increase in sales: Using a loss leader can boost sales for your business. Not only can it increase purchases for sale items, but it can also boost sales for your regularly priced items.
• Elimination of old products: Loss leader pricing helps businesses move old inventory to make room for new products. Retailers place these items at strategic locations in the store, so customers buy complementary products in addition to these items.
• New customers and customer retention: Product or service discounts attract new customers and increase customer loyalty, which has a significant impact on future profits. If customers like the sales you’re offering, they’re more likely to come back in the future and may bring friends.
• Launching new stores: Loss leader pricing entices customers to the new location to build your overall customer base. It can be useful for companies that are breaking into a new market with these stores.

Risks of the loss leader strategy

There are also some risks associated with using a loss leader strategy:

• Cherry-picking. Loss leaders are intended to entice customers to add more items to their purchases. However, some customers will only purchase the sale items without buying anything else. Too much of this activity can fail to offset the loss.
• Weakened brand perception. Knowing your target audience is key to planning this strategy. If your market doesn’t understand the product or the nature of the discount, your brand may be seen as cheap and lacking in quality.
• Teaches people to wait. If you’ve established a certain cadence for dropping your prices, some customers will wait for you to drop your prices before shopping. This sets your business up as a place to go for a sale and not a store for products you need.
• Stocking problems. This happens when you haven’t forecasted just how powerful this sale is. You may run out of products, making customers upset.

Loss leaders can offer new strategies for attracting customers if they’re used correctly. They have to be properly planned, or they can hurt your business’s overall profit, and using them too often can deter customers from returning.

​Frequently asked questions about loss leader pricing

Is the loss leader pricing strategy legal?

In half of U.S. states, including California and Louisiana, loss leaders are illegal. They’re perceived as anticompetitive and predatory to the consumer.

​What industries are loss leaders used in?

Loss leaders are primarily used in the retail industry, such as e-commerce sites and brick-and-mortar stores. Service providers can also use loss leaders seasonally or to generate new customers.

​What are some precautions when it comes to loss leader sales?

Loss leader sales need to be planned and properly advertised to be effective. Two important precautions to take include making sure you have the items in stock beforehand and the price matches what’s in the advertisement. Failure to do these two things could be considered fraud.