The loss leader is a strategy that has been employed a lot throughout time. Briefly put, it’s a pricing strategy where a product is set at a price found below the market cost. The purpose here is to stimulate other sales. Today we are going to find out more about what is a loss leader strategy and what advantages and disadvantages it has.
What Is a Loss Leader Strategy?
The term ‘loss leader’ refers to a product or a service that is set at a price which is not profitable. However, the company decides to sell or offer it with the purpose of attracting new customers or selling additional products and services to them. This is quite a common practice for the businesses that first enter a market. Essentially, when thinking about what is a loss leader strategy, we need to imagine the product/service that introduces the business to new customers. The team thus hopes to build a customer base and to secure future revenue.
The name of the concept, ‘loss lead’, comes from the fact that the product or service designated to fulfill that role of an item that will appear at a reduced price and thus lead to other sales of services and items. These, in turn, will lead to more profit. What’s important to keep in mind is that the loss leader isn’t necessarily sold below cost, but below its minimum profit margin. Moreover, the company should maintain a current analysis of the accounts both for the loss lead and the other associated items. As such, they can monitor how well the strategy is going.
Here is a short clip illustrating what we just explained:
Loss Leader Strategy Advantages and Disadvantages
Loss Leader Pros
Now that you know what is a loss leader strategy, it’s time to have a look at its pros.
1. You Can Enter a New Market
When you’re just starting out, it can be quite hard to convince people to try your products, especially if the market is already saturated with competition. Keep in mind that people are creatures of habit, and it’s a real challenge to make them switch from a competitor to you. Thankfully, loss leader pricing lets emerging brands bring customers with these deals.
2. You Can Promote Other Products
It’s important to strategically choose the loss leaders and the complementary products. If you understood what is a loss leader strategy completely, then you should know which products deserve to become loss leaders and which not. For example, if you are an online clothing retailer and you want to boost your sales of fall coats, you can focus on scarves and gloves and turn them into loss leaders. In this way, you will attract customers to the website.
3. It Brings New Customers
Employing the loss leader strategy is a great idea if you want to bring some new customers to your company. Many people are impressed when they see low prices for items they’d like to buy. Moreover, in a difficult economy, customers might appreciate the fact that you are cutting costs for them. In fact, this decision will help you a lot in the long run since you may reach a big profit in the end.
Loss Leader Cons
1. It Can Hurt Your Brand Perception
Though discounts may seem like a great idea, it is a dangerous strategy to rely only on them. It has been proven that they can hurt a brand as easily as they can help it. The main reason for this is that a deep discount might make customers believe that the low prices are due to the low quality. For this reason, if you overuse the loss leader strategy, you can make people mistake a great deal for a cheap product. Once things aren’t clear anymore, customers will avoid paying for a product that has a low quality.
2. It Makes People Wait for Discounts
If a brand doesn’t know how to use the loss leader strategy correctly, they may end up convincing their customers that it’s better to wait for discounts on certain products than buy them at their full price. Many business owners complain that people wait until November 1st to buy their Halloween candy or until fall to get themselves a new BBQ. As such, never let discounts turn into an expectation of your customers, instead of an exception. The difference here is that customers don’t feel that excitement when they hear about a price cut from your brand.
3. It Requires You to Stock Up
Once you decide to turn a product into a loss leader, it’s very important for you to stock up on it. There needs to be enough product in your store if you want as many people as possible to take advantage of the offer. One example would be the KFC coupon promotion they ran a while ago when they happened to run out of chicken, which made people very angry.
4. It Can Bring You a Loss
It’s essential to do the math correctly before deciding to use the loss leader strategy. If you don’t apply it correctly, you can mark the item on sale too low. In this case, you can never recover the money you lose with the loss leader. Keep in mind that the loss leader is important to lead the bigger sales. If it’s not leading, then you just got yourself a loss, which is bad for your business.
Learning what is a loss leader strategy is a great step if you want to attract new customers. It can also help with bringing back some old customers, but it’s essential to apply the technique correctly. Not calculating your strategy well might bring you significant loss with your business. Moreover, if you use it too often, people might get accustomed to getting low prices for your products, which will damage the rest of your sales. Finally, having low prices too often can make customers believe you offer low-quality products, which is again damaging for business.
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