Loss Leader
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A loss leader (also leader) is a pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services. With this
sales promotion Sales promotion is one of the elements of the promotional mix. The primary elements in the promotional mix are advertising, personal selling, direct marketing and publicity/public relations. Sales promotion uses both media and non-media marketing ...
/
marketing Marketing is the act of acquiring, satisfying and retaining customers. It is one of the primary components of Business administration, business management and commerce. Marketing is usually conducted by the seller, typically a retailer or ma ...
strategy, a "leader" is any popular article, i.e., sold at a low price to attract customers. One use of a loss leader is to draw
customer In sales, commerce, and economics, a customer (sometimes known as a Client (business), client, buyer, or purchaser) is the recipient of a Good (economics), good, service (economics), service, product (business), product, or an Intellectual prop ...
s into a store where they are likely to buy other goods. The vendor expects that the typical customer will purchase other items at the same time as the loss leader and that the profit made on these items will be such that an overall profit is generated for the vendor. "Loss lead" is an item offered for sale at a reduced price that is intended to "lead" to the subsequent sale of other services or items. The loss leader is offered at a price below its minimum profit margin—not necessarily below cost. The firm tries to maintain a current analysis of its accounts for both the loss lead and the associated items, so it can monitor how well the scheme is doing to avoid an overall net loss.


Strategy

Marketing academics have shown that retailers should think of both the direct and indirect effect of substantial price promotions when evaluating their impact on profit. To make a very precise analysis one should also include effects over time. Deep price promotions may cause people to bulk-buy (stockpile), which may invalidate the long-term effect of the strategy. This is the association rule analysis. When automobile dealerships use this practice, they offer at least one vehicle below cost and must disclose all of the features of the vehicle (including the VIN). If the loss-leader vehicle has been sold, the salesperson tries to sell a more upscale trim of that vehicle at a slightly discounted price, as a customer who has missed the loss-leading vehicle is unlikely to find a better deal elsewhere. Loss leaders can be an important part of companies' marketing and sales strategies, especially during "dumping" campaigns.


Characteristics

*A loss leader may be placed in an inconvenient part of the store, such as at the rear of the store, so that purchasers must walk past other goods that have higher
profit margin Profit margin is a financial ratio that measures the percentage of profit earned by a company in relation to its revenue. Expressed as a percentage, it indicates how much profit the company makes for every dollar of revenue generated. Profit margi ...
s. *A loss leader is usually a product that customers purchase frequently—thus they are aware that its unusually low price is a bargain. *Loss leaders are often scarce or provided with limits (e.g., maximum 10 bottles) to discourage stockpiling and to limit purchases by
small business Small businesses are types of corporations, partnerships, or sole proprietorships which have a small number of employees and/or less annual revenue than a regular-sized business or corporation. Businesses are defined as "small" in terms of being ...
es. The seller must use loss leaders regularly if they expect their customers to come back. *Some loss leader items, such as fruits, vegetables and pastries, are perishable and cannot be easily stockpiled by customers. *Some loss leaders, rather than being advertised as bargains, are high-end, costly products offered below profit margin to enhance the company's prestige and/or to attract "lookers" or "window shoppers" who may buy other less expensive but more profitable merchandise. For example, if a pawnshop offers a Harley-Davidson motorcycle in its display window at below the normal profit-making cost, this motorcycle will generate a lot of walk-in traffic during the period before it is sold. Another example would be a restaurant that has a
surf and turf Surf and turf, sometimes called reef and beef, is a main course combining seafood and red meat, typically beefsteak. While lobster and filet mignon are a standard combination, variations common to steakhouse menus include Shrimp and prawn as foo ...
special at the top of the menu of the day, which entices customers. These shoppers may end up using the store's other services or making other purchases. Some examples of typical loss leaders include milk, eggs,
rice Rice is a cereal grain and in its Domestication, domesticated form is the staple food of over half of the world's population, particularly in Asia and Africa. Rice is the seed of the grass species ''Oryza sativa'' (Asian rice)—or, much l ...
, and other inexpensive items that grocers would not want to sell without the customer making other purchases. While some customers may have the discipline to only buy the loss leaders, the loss leader strategy works because a customer who goes into a grocery store to buy an inexpensive bread or milk item may decide to buy other grocery items.


Examples


Record albums

The ''Warner/Reprise Loss Leaders'' were a series of promotional sampler compilation albums released by Warner Bros. Records throughout the 1970s. Each album (usually a 2-record set) contained a wide variety of tracks by artists under contract to Warner Bros. and its subsidiary labels (primarily Reprise Records); often these were singles, B-sides, non-hit album tracks, or otherwise obscure material, all designed to arouse interest in the artists' regular albums. Warner advertised the Loss Leaders albums by inserting special illustrated inner sleeves in all of its regular album releases, listing all of the currently available Loss Leaders and including an order form. Each loss leader double album was priced at US$2, significantly less than a comparable regular-release double album of the time. The first Loss Leaders compilation was ''The 1969 Warner/Reprise Songbook'', featuring a wide range of artists from Miriam Makeba to The Mothers of Invention; the last of the original series was the punk and new wave-themed ''Troublemakers'' in 1980.


Video cassettes

In 1979, American businessman Earl Muntz decided to sell blank tapes and VCRs as loss leaders to attract customers to his showroom, where he would then try to sell them highly profitable widescreen projection TV systems of his own design. His success continued through the early 1980s.


Automobiles

On its launch in 1959 the
British Motor Corporation The British Motor Corporation Limited (BMC) was a United Kingdom, UK-based vehicle manufacturer formed in early 1952 to give effect to an agreed merger of the Morris Motors, Morris and Austin Motor Company, Austin businesses.Morris-Austin Merge ...
's Mini car was sold at a starting price (including taxes) of £496 for its most basic model, and it was estimated that BMC lost £30 per car sold at this price. However, the headline-grabbing price was significantly lower than that of the car's contemporary rival, the Ford Anglia—indeed the only cheaper four-wheeled, four-seater car on the British car market at the time was very basic and old-fashioned Ford Popular, which sold for only £2 less than the basic Mini. While BMC lost money on every basic Mini sold, such cars were unattractive to many buyers since they lacked features such as heaters, floor carpets and opening rear windows and BMC priced the better-equipped models (which cost from £537) to make a small profit, using the basic car as a loss-leader to allow the promotion of a starting price below the significant £500 mark and to make the Mini at least appear to undercut its main rival on price. The ploy did not work entirely as BMC intended—even in its most basic form, the Mini was far superior in many areas to its rivals while also being lower in price. BMC sold far more basic Minis than it had anticipated, meaning that it sold many Minis at a significant loss. Despite the car being a bestseller in Britain (and several other markets) it made little to no profit for many years.


Perishable food

Supermarket A supermarket is a self-service Retail#Types of outlets, shop offering a wide variety of food, Drink, beverages and Household goods, household products, organized into sections. Strictly speaking, a supermarket is larger and has a wider selecti ...
s sell food staples such as
banana A banana is an elongated, edible fruit – botanically a berry – produced by several kinds of large treelike herbaceous flowering plants in the genus '' Musa''. In some countries, cooking bananas are called plantains, distinguishing the ...
s or
milk Milk is a white liquid food produced by the mammary glands of lactating mammals. It is the primary source of nutrition for young mammals (including breastfeeding, breastfed human infants) before they are able to digestion, digest solid food. ...
at less than the cost at which they were purchased in order to draw customers to their business. These items are typically strategically placed far from the entrances of the store to enhance this effect. In the case of milk, supermarket chains often refuse to pay market rates to avoid making a loss.
Costco Costco Wholesale Corporation is an American multinational corporation which operates a chain of membership-only big-box warehouse club retail stores. As of 2021, Costco is the third-largest retailer in the world, and as of August 2024, Cos ...
sells its very popular quarter-pound hotdog and soda combo for $1.50
USD The United States dollar (symbol: $; currency code: USD) is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it int ...
, a price point that has not changed since 1985 and is believed to be well below cost, to bring customers into the store. It also sells its rotisserie chicken well below cost, at $4.99. Supermarkets in the UK including
Tesco Tesco plc () is a British multinational groceries and general merchandise retailer headquartered in the United Kingdom at its head offices in Welwyn Garden City, England. The company was founded by Jack Cohen (businessman), Sir Jack Cohen in ...
,
Asda Asda Stores Limited (), trading as Asda and often styled as ASDA, is a British supermarket and petrol station chain. Its headquarters is in Leeds, England. The company was incorporated as Associated Dairies and Farm Stores in 1949. It expanded ...
, Sainsburys and Morrisons have engaged in an annual loss leader
price war A price war is a form of market competition in which companies within an industry engage in aggressive pricing activity "characterized by the repeated cutting of prices below those of competitors". This leads to a cycle, where each competitor att ...
for Christmas vegetables since discounters Aldi and
Lidl Lidl ( ) is a trademark, used by two Germany, German international discount supermarket, discount retailer chain store, chains that operates over 12,600 stores. The ''LD Stiftung'' operates the stores in Germany and the ''Lidl Stiftung & Co. K ...
gained market share. Christmas staple items such as carrots, cabbage and sprouts are priced as low as 8p per kilogram - well below the price the businesses pay to farmers and the usual RRP of around 70p. The tactic intends for customers to pick up the cheap vegetables and then do a full shop that includes highly profitable Christmas items such as desserts, Christmas crackers and decorations. There is some concern that this intense price war hurts farmers.


Diapers/nappies

Many toy store chains and online retailers sell diapers or nappies as a loss leader in order to entice parents into the store in the hopes that the children will spot toys, bottles or other items that the family desires.


Hardware/tool stores

Large hardware stores often sell larger tools, such as drills or electric saws at cost or below. They do this expecting customers to buy accessories such as blades, drill bits, stands, or cases, along with the new tool. These items tend to have a much higher profit margin, and are often impulse buys.


Smartphones and mobile electronics

Some consumer electronics stores use smartphones and other mobile electronics as loss leaders. The company makes less profit on smartphone or mobile devices, but it makes up for this through the sales of higher-profit accessories such as cases, headphones and power adapters.


Home video game consoles

Gaming consoles, such as the
Xbox 360 The Xbox 360 is a home video game console developed by Microsoft. As the successor to the Xbox (console), original Xbox, it is the second console in the Xbox#Consoles, Xbox series. It was officially unveiled on MTV on May 12, 2005, with detail ...
/
PlayStation 3 The PlayStation 3 (PS3) is a home video game console developed and marketed by Sony Computer Entertainment (SCE). It is the successor to the PlayStation 2, and both are part of the PlayStation brand of consoles. The PS3 was first released on ...
,
Xbox One The Xbox One is a home video game console developed by Microsoft. Announced in May 2013, it is the successor to Xbox 360 and the third console in the Xbox#Consoles, Xbox series. It was first released in North America, parts of Europe, Austra ...
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PlayStation 4 The PlayStation 4 (PS4) is a home video game console developed by Sony Interactive Entertainment. Announced as the successor to the PlayStation 3 in February 2013, it was launched on November 15, 2013, in North America, November 29, 2013, in ...
, or Xbox Series X/S/
PlayStation 5 The PlayStation 5 (PS5) is a home video game console developed by Sony Interactive Entertainment. It was announced as the successor to the PlayStation 4 in April 2019, was launched on November 12, 2020, in Australia, Japan, New Zealand, North ...
, are often initially sold as loss leaders. This helps assert market share for the console, which enables the creation of a development ecosystem for games. The profit is then made on the sale of games and accessories over the system's lifetime.


Printers

Often, printers sell at or below cost, drawing a consumer in with tantalizing low prices. These manufacturers know the overwhelming majority of consumers will stick with genuine OEM ink cartridges rather than opting for less reliable remanufactured and compatible third-party products.


See also

* Bait-and-switch *
Competition law Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust ...
* Dumping (pricing policy) * Freebie marketing * Parallel importing * Predatory pricing * Pricing strategies * Product bundling * Razor and blades model * Suicide bidding * Tying (commerce)


References

{{Reflist Pricing Advertising techniques Marketing techniques Selling techniques