A loss leader is a pricing strategy that implies offering goods and services below their cost to attract new customers. It’s widely used by big retailers and companies that just enter 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 thus negatively affects customers. By selling products below cost, large retailers hope consumers to make impulse buys which hurts shoppers' finances by provoking them to buy often 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. It often encourages buyers to make impulse purchases. Consumers are expected to take not only convenience products but also other items that will bring benefit to the store.

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

Why are loss leaders used by some retailers?

Loss leaders are commonly used by retailers 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 the main aim here is customer loyalty. However, not always everything happens according to the plan and many buyers leave the store after purchasing the item 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 of the store 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 the strategy, it’s time to proceed to the pros and cons of loss leaders.

Loss Leader Pricing Advantages and Disadvantages

Big corporations obtain several benefits, that’s why they can afford to take a loss. The pros are:

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  • the opportunity to sell outdated stock.

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

  • cherry-picking (when a shopper buys in different stores once to get products at the lowest price);
  • a store’s stock of products depletes quickly because of the poor forecast of the sales;
  • decreased value of a brand because of the customers who wait and buy only discounted products;
  • reduced profit for manufacturers 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 the strategy to make customers purchase more. Many of them succeeded in achieving their goals. Let’s find out which of them.

  • Netflix. This streaming service provides viewers all over the world with a wide variety of TV shows, movies, and documentaries. Yet the platform that in 2020 had 203.67 million paid subscribers worldwide didn’t instantly become popular. To bring in more new customers each year, Netflix offers a free month for potential clients to watch shows and movies in the hope to obtain new subscribers.
  • Gillette. The brand sold their razors below cost several years ago. By buying these razors, customers further 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.

So now you are acquainted with this technique, its pros and cons, and can consider it for your business. Hopefully, our examples inspired you for your idea.

Resources:

  1. This article defines the term, explains the disadvantages of the loss leader 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, advantages and disadvantages.
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