Have you ever thought that you can also buy a product at a price below its cost? If I tell you that you can. I am talking about loss leader pricing, which is an aggressive pricing strategy. Today, we’ll discuss the loss leader pricing strategy in detail and why businesses are willing to follow it.
What is Loss Leader Pricing Strategy?
Loss leader strategy is the process of selling the company’s product/service at a price lower than its cost, without profit. Loss leader pricing strategy serves two purposes; first is to attract new customers, and the second is to finish the inventory or additional products.
New businesses and companies follow the loss leader pricing strategy when they enter the market. The purpose is to attract price-conscious customers and make a customer base in the market.
Some critics call it a controversial strategy because it’s too aggressive. Businesses want to gain the maximum market share; in the beginning, that’s why they penetrate the market with a loss leader pricing strategy. It’s for the big companies because they can afford no profit at a new product line. On the other hand, it’s a risky pricing strategy for small businesses.
How Loss Leader Pricing Woks
Now, the question is how loss leader pricing strategy works, the secrete lies at its execution. If you’re able to execute it well, only then you’d be able to get the desired results. For instance, Gillette, Razor Blade Company, sometimes offers a free blade to its customers or charges a low price. It’s because they know that the customers would have to repurchase it to repeat the experience.
Microsoft’s Xbox, video gaming product initially sold its product at a very low price because the management had the confidence in its product that it would create the customers’ market, and it would attract more customers and more profit ultimately.
The loss leader pricing strategy also goes by the name of the price penetration strategy or aggressive strategy that the businesses use to enter the market. On the other hand, the loss leader strategy critics say that it compels competitors to get out of the market and it’s predatory.
Is loss leader pricing illegal?
Many businesses have indeed acquired a great profit by using the loss leader pricing strategy, and they push many competitive businesses out of the market. Therefore, many states in the US have very strict laws about selling the products at a certain price level.
Globally, some countries have laws against loss leader pricing strategy, and it’s illegal in such countries. It’s legal in those countries that don’t have laws against them. But it’s better to check the local laws of the country before applying any strategy.
Characteristics of Loss Leader Strategy
Some of the main characteristics of the loss leader pricing strategy are as follows;
Diligently placing it
As we have discussed earlier, the reason behind the success of the loss leader pricing strategy is to place it effectively so that it would make customers walk towards the store. When you expose the company’s less price offer to the customers, then it’s highly probable that they would buy your product/service.
When I say that you should place it diligently, it means that you should place it among the category of the same product offers. but when you present them in combination, then it provides customers a choice. Therefore, it increases the chances of purchase, more sales means that the company would gather more revenue.
Limited offer and availability
Another characteristic of loss leader pricing strategy is that such offers are limited for a short time only. The purpose is to compel customers that they should decide quickly, instead of waiting for the repeat purchase. Sometimes companies offer limited availability of product/service. It means that the customers won’t be able to stock products because of the short expiration date.
For instance, sometimes companies set the limit that every customer shouldn’t buy more than 20 or 30 per unit product.
Attracting New Customers
Sometimes companies offer premium products/services at a less price. As some of you may know that the premium products are usually of high quality and have prices. When the company applies a loss leader pricing strategy at its premium products, it attracts many window shoppers and other customers.
When they see a premium product/service being offered at a lower price, they will check it out.
Advantages of Loss Leader Pricing
Some of the main advantages of the loss leader pricing strategy are as follows;
There are varieties of customers in the market; you can’t put them in one category. Some customers just stopped visiting the company’s retail store because of several reasons. When companies adopt the loss leader pricing strategy, it helps to attract both existing and new customers simultaneously.
Breaking the Brand Loyalty
When a company offers low prices on premium products of the same quality that the competitors are offering, then even 8 out of 10 loyal customers of other brands would check out your product/service. That’s how businesses build brand loyalty and create their customer base.
Small Loss and Huge Profit
Think of it from this perspective that businesses have to incur a small loss, but it helps them to create a customer base by attracting new and old customers. This customer base would increase your sale and revenue stream in the future.
Disadvantages of Loss Leader Pricing
Some of the disadvantages of the loss leader pricing strategy are as follows;
Maintenance of Stock
A very common issue arises when you offer products/services at a low price, then many customers would visit your store, and they would like to buy the same product. When you have many orders to complete in such circumstances, you must have to make sure that you have sufficient stock to fulfill the order. If more customers would come, then you should have back up stock to serve them as well.
Setting the right price for your product/service is the main reason for your strategy’s success. You have to make sure that the price is not too low that your company won’t recover from the loss. It should be at a point that you should attract new customers, recover from the loss easily, and earn more profit.
Loss Leader Pricing Examples
You must have come across this offer that shopping malls and retail stores provide free product samples to their customer at different stores across the country. It could be in the form of free food samples that different retail stores offer, you must have seen while walking down the street or visiting a shopping mall.
Mobil phone/iPhone Ties-up
iPhone and other mobile phone companies offer their product (mobile devices) at a less price, but with easy installments for one year or two years plan. Customers purchase the product at a low price, and the rest of the amount they would pay it in the form of monthly installments for one or two years.
Loss leader pricing strategy is a very effective strategy if businesses can set the right price and place the product in the right combination. Most importantly, you should also check the country’s local laws where you’re going to launch your product/service. If the country’s law allows it, only then you should adopt the loss leader strategy.
Loss leader pricing grabs the customers’ attention when they visit a store. A customer is likely to see several other things, but this strategy builds a connection between the needed things and attractive sales items. For instance, America electric retailer Earl Muntz offered blank tapes and VCRs at a discount, which attracted customers to his showroom and tried to sell high projection TV sets.