Loss Leader
Pricing Strategies
One use of a loss leader is to draw customers
into a store where they are likely to buy other goods. The vendor expects
that the typical customer will purchase other items at the same time
as the loss leader and that the profit made on these items will be such
that an overall profit is generated for the vendor.
In marketing, a loss leader is a type of
pricing strategy where an item is sold below cost in an effort to stimulate
other, profitable sales. It is a kind of sales promotion.
An example of the loss leader would be a supermarket selling sugar or
milk at less than cost to draw customers to that particular supermarket
chain.
When automobile dealerships use this practice, they usually offer at
least one vehicle below cost and must disclose all of the features of
the vehicle. If the loss leader vehicle has been sold, the salesperson
has no choice but to try to sell another vehicle at regular price. If
someone is not the first person at the dealership when there is a "1
only at this price" vehicle for sale, it is not likely that he or she
would find the car at that price near the end of the day.
Loss leader vehicles are
typically new vehicles and they are almost always base models that do
not bring much profit to the dealership. However, at the end of the
month, provided sales have been good, the manufacturer may choose to
give give the dealership bonus money. If the dealership is a certified
dealership, e.g., Ford "Blue Oval Certified," part of their advertising
funding will come directly from Ford. This bonus/ad money will often
be used to pay for the loss of profits with the loss leader. Loss leaders
help generate lots of foot traffic at vehicle dealerships.
A loss leader may be placed
at the back of a store, so that purchasers must walk past racks of other
displayed goods which have higher profit margins.
A loss leader item is usually
a product that customers purchase frequently—thus they are aware of
the usual price and that the offered price is a bargain.
Items offered as loss leaders are often very limited in number, which
discourages stockpiling by customers. A retailer must subscribe to this
method of selling on a regular basis in order to compel customers to
make repeat visits.
Sales of related items
over time
This is also known as the razor and blades business model, referring
to the most famous example. Razor handles are sold at a loss, but sales
of disposable razor blades are very profitable. American businessman
King Gillette famously invented this business model, in which safety
razors were sold or even given away as loss leaders so that his company
could profit by selling disposable razor blades.
This also translates to
higher prices that are charged for the games and for original console
accessories such as game controllers. Furthermore, the price of a game
developed for multiple platforms (for example, Xbox 360, PS3, and PC)
is typically the same across all of those platforms, even if one or
more of the platforms is not actually a loss leader.
Inkjet printers are also
often sold to retail customers below their true value and could also
be viewed as loss leaders. Some of the printers, especially the entry-level
models, are sold at a loss-leading price which seems apparently affordable
to most consumers, but they pay the regular price for ink cartridges
and specialty papers supplied by the manufacturer.
Dealers who normally use
"fruit-shop" style trading methods--stocking small quantities of a variety
of products, cannot compete with loss leaders by negotiating to buy
larger quantities of consumables at a lower price because they would
still have to sell at a loss to be competitive. Loss leaders can be
an important part of companies' marketing and sales strategies.
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