Exploring the Use of Loss Leader Pricing

Loss leader pricing
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Loss leader pricing is a sales strategy used to gain a foothold in a new market. The intent is to get a new product into a customer’s hands. The fastest way to do that is to put it into the marketplace for customers to buy at less than the production cost.  

Smart or not?  

It depends on how it is done. For the intention of getting a new product released to the market fast, it can be a smart move, provided you have additional products available to buy that are priced for profit. The full-priced products with a markup should, hopefully, offset the cost of the loss leader.  

If you only have one product to sell though, you are going to incur a loss. It will be inevitable since no other products are there for customers to buy. Add-ons are part of the process. Consider loss leaders as the front end of a sales funnel. Something else needs to be there to turn a profit somewhere in the funnel.  

Beware of the drawbacks of loss leader pricing  

Losses (obviously) 

Strategy plays a huge part in product pricing. The inevitable risk is in the name – Loss leader. The whole concept only works if the business has the means to counter the loss with additional products that customers can add to their baskets, or in the case of subscriptions, continue at a profitable price that customers find reasonable.  

There will always be savvy customers who buy only the loss leaders for the savings, and intentionally avoid buying items with a higher markup. Losses will be incurred. The hope, and entire marketing strategy, is to make enough sales of full-priced products to counter the loss on the initial offer.  

Reduced sales  

If loss leaders become an integral part of your sales and marketing strategy, customers will become acquainted with seasonal reductions. In the electrical retail sector, this is most noticeable around Black Friday. Savvy customers save throughout the year, then pounce on big brand names running phenomenal discounts. Too many sales of only loss leaders can lead to irreparable financial damage to the business bank account.  

Big brands can afford to take huge losses. The smaller independent retailers, and even some chains, cannot afford to incur losses at any comparable scale.  

To avoid that, limitations are placed on items, either on a per-customer basis, or a limit on the stock inventory. Like, 100 products only. A supermarket could advertise crazy discounts, follow through and sell at a loss, but then sell out of the advertised product within the first hour of the sale. The profits come from the latecomers buying alternative items.  

Any store owner selling custom handmade items could do well with loss-leader pricing, but it is not without its risks. It can… 

Devalue a brands perception  

An item that is suddenly devalued to increase sales will raise eyebrows with existing loyal customers. Consider, for example, a luxury soap brand. Bars could be priced at £15 per bar and marketed as organic, plant-based with essential oil extracts.  

If normal pricing is a 20% markup, then it is suddenly sold at 50% off, it is clearly going to make a loss and likely increase sales, but there are also likely to be customers thinking that they have been paying far over the odds on every other purchase they made previously.  

The knock-on effect could be a reduction in customer loyalty. Or, an increase in customers waiting to only stock up during loss-leading sales campaigns.  

Loss leader pricing can be a good sales practice to increase sales, but only occasionally and when strategically planned. Do it too many times and customers can become accustomed to expecting considerable drops in your product pricing and wait it out before buying. Then stock up while your losses pile up.  

Approach loss leader pricing with caution!  

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