Loss Leader Strategy

Definition

A loss leader strategy is a marketing method where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services. The idea is that this heavily discounted item will attract customers, who will also buy other products, thereby increasing overall revenue. It is commonly used in a variety of retail industries, from supermarkets to electronics.

Phonetic

The phonetics of the keyword “Loss Leader Strategy” is:/lɒs ˈliːdər ˈstrætɪdʒi/

Key Takeaways

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1. Customer Attraction and Shopper Flow: The primary purpose of a loss leader strategy is to attract customers to a business. By offering selected goods or services at a loss, businesses aim to stimulate other profitable sales. It also leads to increased customer traffic, driving further sales opportunities.
2. Boosting Sales Volumes: Loss leader strategy is an excellent way to quickly boost sales volumes, which can be very useful in clearing out inventory, allowing new and more profitable products to take their place. It’s a smart strategy to increase the turnover of other, more profitable items.
3. Risk Factors: While using a loss leader strategy can be a strong tool in the hands of a business, it can also lead to potential pitfalls if not managed well. Significant risks include the possibility of consumers only purchasing the loss leader without any attached sales, and competitor businesses price matching or undercutting the loss leader item, negating its effectiveness.

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Importance

The Loss Leader Strategy is integral in business and finance as it proves to be a potent marketing tool to attract customers. It entails selling a product or service at a price that is not profitable but can potentially lead to either indirect profits or market share growth. Businesses often use it to lure customers in, with the expectation that while they purchase the lower-priced items, they are likely to buy other goods or services as well that have higher margins. Thus, despite selling some products at a loss, the strategy aims at increasing overall profitability. This strategy is particularly vital in highly competitive markets where attracting customers and retaining customer loyalty can be challenging.

Explanation

The primary purpose of a Loss Leader Strategy in business is to attract new customers or entice existing ones into a store with the hope of them purchasing more than just the discounted item. The strategy involves setting the price of a popular product below its its normal cost. While the company may incur a loss in selling the discounted item, they anticipate that customers will also purchase other regularly priced items, leading to an overall gain. For example, a supermarket might sell a popular brand of cereal at a loss, but expects that customers will also buy milk, eggs, and other assorted goods.This strategy is widely used to increase customer traffic, clear out obsolete inventory, and interrupt a competitor’s pricing strategy. Additionally, it also helps businesses upsell or cross-sell other products, thus maximizing their profit. For instance, electronic stores often sell certain items at a discounted rate with the expectation customers might buy related accessories or extended warranties. While the Loss Leader Strategy involves risk, when implemented effectively, it can lead to increased sales volume and customer loyalty.

Examples

1. Supermarket Specials: A common setting for a loss leader strategy is a supermarket. Items like milk, eggs, or bread are often priced very low to entice customers to shop there. While they may take a loss on these products, the hope is that once the customers are in the store, they will make additional purchases, resulting in an overall profit for the store.2. Video Game Consoles: Many video game companies like Sony or Microsoft often sell their consoles at a loss initially. The aim is to create a larger user base who will then buy games, subscriptions, and accessories over a long period of time. In this case, the profit from selling these additional items can far outweigh the initial loss on the console itself.3. Razor and Blades Model: This is a popular example of the loss leader strategy. Companies like Gillette will sell the razor handle at a lower price or even give it away for free. The initial loss is recouped by selling the necessary replacement blades at a higher margin. Once the customer has the handle, they’re more likely to continue buying the higher-margin blades.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Pricing Strategy
• Market Penetration
• Customer Acquisition
• Product Promotion
• Profit Margin

Sources for More Information

• Investopedia
• Corporate Finance Institute
• Business News Daily
• Marketing91