Definition: Loss Leader
A loss leader is a pricing strategy used by businesses where a product or service is sold at a price below its market cost in order to attract customers. The primary goal of this strategy is not to make a profit from the sale of the loss leader itself but rather to draw in customers who are likely to purchase additional high-margin products or services. This approach is commonly employed by retailers to increase foot traffic and by online businesses to generate site visits and upsell.
Examples of Loss Leaders
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Supermarkets and Grocery Stores: Often, supermarkets will sell staple items like milk or bread at a loss to encourage shoppers to enter the store. Once in the store, customers are likely to purchase additional items, which helps to offset the initial losses.
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Electronics Retailers: Video game consoles are frequently sold at a loss, particularly during initial release phases. Manufacturers and retailers rely on the sale of games, accessories, and subscriptions to recoup losses and generate sustained profits.
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Online Service Providers: Many streaming services or software companies offer free basic versions or trial periods of their product. The intention is to convert users to paid subscriptions or premium features once they are familiar with the service.
Frequently Asked Questions (FAQs)
What is the purpose of a loss leader?
The main purpose of a loss leader is to attract customers to a business with the hope that they will make additional purchases of higher-margin items.
Are loss leaders sustainable in the long term?
Loss leaders can be sustainable if the business can consistently convert the traffic generated by the loss leader into profitable sales. However, it requires careful management and understanding of customer purchasing behavior.
Can any product be used as a loss leader?
Not all products are suitable as loss leaders. The product chosen should be one that is in high demand and can draw in a significant number of customers who are likely to make additional purchases.
Is the use of loss leaders ethical?
The use of loss leaders is generally considered ethical and legal as long as it is not intended to drive competitors out of business through predatory pricing practices.
How do companies decide which items to use as loss leaders?
Companies often choose high-demand, frequently purchased items as loss leaders. They may also choose items that naturally lead to the purchase of related products or services.
Related Terms
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Upselling: A sales technique where the seller encourages the customer to purchase a more expensive item, upgrade, or add-on to generate more revenue.
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Cross-Selling: A strategy that involves selling additional products or services to an existing customer, often related to the initial purchase.
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Predatory Pricing: An anti-competitive strategy where a product is sold at a very low price with the intention of driving competitors out of the market, and then raising prices once the competition is eliminated.
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Price Bundling: Selling multiple products or services together as a single combined unit, often at a discount.
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Penetration Pricing: A strategy where the price is set artificially low to gain market share quickly.
Online References
Suggested Books for Further Studies
- “Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures” by Tim Morris.
- “Priceless: The Myth of Fair Value (and How to Take Advantage of It)” by William Poundstone.
- “The Strategy and Tactics of Pricing: A Guide to Growing More Profitably” by Thomas T. Nagle and Georg Müller.
- “Pricing for Profit: How to Develop a Powerful Pricing Strategy for Your Business” by Peter Hill.
Accounting Basics: “Loss Leader” Fundamentals Quiz
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