Loss Leader Strategy
What Is a Loss Leader Strategy?
A loss leader strategy includes selling a product or service at a price that isn't profitable yet is sold to draw in new customers or to sell extra products and services to those customers. Loss leading is a common practice when a business first enters a market. A loss leader acquaints new customers with a service or product in the hopes of building a customer base and getting future recurring revenue.
Understanding a Loss Leader Strategy
Loss leading can be a fruitful strategy whenever executed appropriately. A classic model is razor blades. Gillette, for instance, frequently offers their razor units for free or at a low price, realizing that customers must buy replacement cutting edges, which is where the company creates its gain.
Another model is Microsoft's Xbox One video game control center. The product was sold at a low margin for every unit, except Microsoft realize that there was potential to profit from the sale of video games with higher margins and memberships to the company's Xbox Live service. The loss leader strategy is common all through the video game industry and, much of the time, consoles are sold for short of what they cost to build.
The loss leader strategy is otherwise called penetration pricing as the manufacturer endeavors to penetrate the market by pricing its products low.
Rivals of loss leader pricing practices contend that the strategy is predatory in nature and intended to force contenders out of business.
Loss Leaders and Retail Shops
Both brick-and-mortar stores and online shops use loss leader pricing strategies. These businesses much of the time price a couple of things so low that there is no profit margin. The hope is that once the shopper buys the product from the store or the website, the shopper will buy different products and become faithful to the brand. Sadly, for business owners, consumers in some cases leave without buying different products or buying into the brand. This consumer practice of bouncing from one shop to another and picking up loss leader things is called cherry picking.
A few retailers place loss leaders at the rear of their stores so consumers should walk by other, more costly products to get to them. One of the most practiced instances of this is the sale of milk. Milk, a common household thing, is frequently placed at the rear of each and every supermarket, requiring an individual to pass by pretty much every other thing in a supermarket.
Even on the off chance that the shopper just came in the store to buy milk, it is probable they will purchase extra things as they walk by them while heading to the milk section and then, at that point, back to the register, bringing about increased sales for the shop.
Loss Leaders and Introductory Pricing
Early on pricing can likewise be a loss leader. For instance, a credit card company might offer a low introductory rate to tempt clients to utilize a card or transfer their existing balances. Then, in the wake of catching the client, the company raises its interest rates. Essentially, cable companies frequently offer low rates, some of the time at a loss, for an initial period to draw in new customers or to bait customers from contenders.
Disadvantages of a Loss Leader Strategy
For businesses that utilization a loss leader strategy, the most serious risk is that clients may just exploit the loss leader pricing and not utilize any of the business' different products and services. Also, some small-business owners gripe that they can't rival large corporations who can assimilate the losses implicit in this strategy.
At last, providers to companies who follow a loss leader strategy might experience pressure to keep their own prices low with the goal that the company utilizing a loss leader strategy can keep on doing as such.
Features
- Loss leading strategies can sting small businesses as well as providers, who may be forced to keep their own prices low so a business can go on with its loss leading strategy.
- A loss leader strategy prices a product lower than its production cost to draw in customers or sell other, more costly products.
- A few companies utilize a loss leading strategy while expecting to penetrate new markets to gain market share.
- Loss leading is a dubious strategy that is thought of as predatory.
- Large companies can bear to price a product with no margin since they have different products they can sell profitably to compensate for the loss.
