Loss Leader Pricing

What is Loss Leader Pricing?

Loss leader pricing is a marketing strategy that involves selecting one or more retail products to be sold below cost – at a loss to the retailer – in order to get customers in the door. The loss leaders are the products being sold at such low prices as an enticement to buyers to step foot in the store.

Think about all the crazy deals retailers offer on Black Friday in the U.S. – the day after Thanksgiving. Starting at the crack of dawn, and on Thanksgiving Day at some stores, retailers will promote products being sold at a fraction of their suggested retail price as a reason for shoppers to shop there instead of at the store next door. They might even place the loss leaders in the way back of the store, requiring customers to walk the entire length of the property – past lots of other products – in order to reach the bargain-priced item.

Grocery stores often use milk as a loss leader, in part because most supermarkets have milk in refrigerated units in the way back of the store. Even if milk isn’t sold at a loss, enticing shoppers into the store in order to buy milk is very likely to result in additional sales as they walk back through the aisles to the cash registers in the front of the store.

With any loss leader product, retailers hope that, once inside the store, buyers will also buy other items that are being sold at their full retail price. The profit from those additional purchases generally more than compensate for the losses on the one.

Cherry Pickers

The one thing that can cause problems for retailers using loss leader pricing is the cherry pickers. Cherry pickers are customers who only buy the loss leaders – they cherry pick the best deals and leave without buying anything else.

These customers are an issue for retailers because they don’t buy other full-price items while in the store. So the stores truly take a loss whenever those buyers shop. For that reason, many retailers have introduced limits to the quantity of sale items that can be purchased at one time.

Built-in Loss Leader Opportunities

While loss leader pricing is most often used in retail settings, it can also be applied to product marketing.
Think about consumable products, like razors and razor blades, for example. Most razor manufacturers are happy to sell the razor unit at a loss because they will make a profit every time a customer buys replacement razor blades.

Or floor sweepers that use disposable wet or dry sheets to clean the floor. The money is in the replacement sheets, so the manufacturer may elect to sell the starter kits at a loss in order to generate demand for the sheets.

Pricing a product at a loss can still be profitable if the customer can be persuaded to purchase other items at full price during the same shopping trip.

 

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