A loss leader is a pricing strategy that involves offering goods and services below their cost to attract new customers. It’s widely used by big retailers and companies that have just entered the market to introduce their goods and services to a wider audience.

Is loss leader pricing illegal?

This pricing strategy is illegal in some European countries and Australia. In the US, it has been banned in several states like Oklahoma, California, and Colorado.

Loss leading is anti-competitive and can negatively affect customers. By selling products below their cost, large retailers hope that consumers make impulse buys, which often hurts shoppers’ finances by provoking them to buy unnecessary products. Statistics say that 84% of all buyers have made impulse purchases, and 54% of US customers have spent $100 or more on such buys.

Although it’s illegal in some countries, big chain stores still price convenience products below their cost to lure more leads and customers. Consumers are also expected to purchase not only convenience products but also other items, which benefits store owners.

Let’s continue exploring this topic by finding out more about the connection between loss leaders and retailers.

Why do some retailers use loss leaders?

Retailers commonly implement this strategy because of the possible profits these offline and online stores can obtain. As a rule, retailers set low prices on a few items so that there’s no profit margin.

Businesses hope that once customers buy something from their store or site, they will make a second purchase after a while. Eventually, these people are supposed to become regular customers, so customer loyalty is the main aim. However, it does not always happen according to the plan, and many buyers leave after purchasing something once.

Some retailers place these discounted items at the back of their stores to make customers walk by other products to get to them. Let’s take milk, for example. Presumably, you haven’t wondered why it’s placed at the back when it’s on sale. It’s necessary to make consumers purchase some additional goods.

Now that you know why online and offline stores use this strategy, it’s time to proceed to the pros and cons of loss leaders.

Loss leader pricing advantages and disadvantages

Big corporations can afford to take a loss because they obtain several benefits. The pros are:

  • an opportunity to enter a new market;
  • increased traffic to companies;
  • improved brand loyalty;
  • higher level of brand engagement;
  • a chance to promote other goods and services;
  • an increase in sales;
  • more new prospects and customers;
  • an opportunity to sell outdated stock.

Now it’s evident that large retailers implement loss leader strategy not only lose but benefit as well, yet we still need to dig deeper into the cons this practice can bring:

  • cherry-picking (when a shopper buys in different stores once to get the products at their lowest price);
  • a store’s stock of products depletes quickly because of the poor forecast of sales;
  • the value of a brand decreases because some customers wait and buy only discounted products;
  • the profit for manufacturers reduces since the volume of orders on these products from competitors drops;
  • negative impact on small businesses.

Let’s move to the examples to grab some inspiration.

Examples of loss leader pricing strategy

Large companies use this strategy to make their customers purchase more. Many of them succeeded in achieving their goals.

  • Netflix. This streaming service provides viewers all over the world with a wide variety of TV shows, movies, and documentaries. However, the platform that had 203.67 million paid subscribers in 2020 didn’t become popular instantly. To bring in more new customers each year, Netflix offers potential clients a free month to watch shows and movies.
  • Gillette. The brand used to sell its razors below their cost several years ago. By buying these razors, customers also had to purchase replaceable blades to use them many times. This way, Gillette managed to obtain a repeat customer base and constant revenue.
  • IKEA. The company that sells furniture also implements this practice through the smart placement of IKEA’s items. Products with a different price range are placed together to attract customers and make them buy items that match.

Now you are acquainted with this technique, its pros and cons, and can consider it for your business. Hopefully, our examples inspired you to develop a unique idea for your business.

Resources:

  1. This article defines the term and explains the disadvantages of the strategy.
  2. In this article, you can find a definition of the term and examples.
  3. This article defines the term, covers the types of loss leader pricing strategies and advantages and disadvantages.
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