Q: I have heard about loss leaders, but don’t know what they are. Can you enlighten me?
A: The loss leader is a tried-and-true pricing strategy that can be a great way to grow any business. Using it you can get old customers back, bring
new ones in the door, and increase sales. Sound good? You bet, but it comes with a price — if done incorrectly, you can lose a lot of money.
It’s a simple concept, really. You offer a popular product of yours at a steep discount, a crazy discount, at a loss even, hence the name, “loss leader.” But at the same time, by offering a fantastic bargain on a specific item (or items), you lead customers to your business, with the intent of having them buy, not only the bargain, but other things from you that are not discounted. As such, the loss leader can turn looky-loos into new customers.
When you see an ad for amazing sale somewhere, that store is using the loss leader strategy. They are hoping to lure you into their shop with the discounted ad price, and then sell you something more expensive. Customers may buy the discounted item, or they may not. The important thing is that they are visiting the business. To make sure it works for you, a couple of precautions are necessary:
First, you need to be sure that the lost profit can be countered by the sales of other goods or services. If you price something too low, and people don’t buy anything else, the loss leads nowhere. It’s no longer a loss leader, it’s just a loss.
Second, be sure that you actually have the discounted item for sale, and at the price you advertised it. Not having it (unless you sell out), or not having it at the price you mentioned in the ad, is fraud and is illegal.
Here’s an example of how to use this strategy: Let’s say that you own an electronics store. By advertising a popular smartphone for cost you will undoubtedly drive traffic to your store. Then, once shoppers get there, and get to the smartphone display, you might also have displayed there some headphones, or some cool speakers, or a pre-paid plan, or other item that could compensate for loss on the actual phone. The loss leads to a bigger sale, see?
Other than getting a sale, the loss leader strategy can also be also used for:
- Getting rid of unwanted merchandise: If you have a storeroom full of old merchandise that isn’t moving or you otherwise want to get rid of, a loss leader can move it.
- Attracting new customers: As indicated, new customers can be made aware of your business by using the loss leader strategy. For example, the owner of the electronics shop could buy a lot of cell phone covers, discount them, and thereby attract the always-desirable younger shopper with disposable income.
- Building your brand: If you would like to be known as the “low-cost leader”, then a loss leader strategy will help associate your franchise with that slogan. When McDonald’s starts advertising $1 meals, you can bet it is employing the loss leader strategy to build its brand (and get people in the door to boot.)
- Build repeat customers: People like a bargain. If they find that you are offering one, then they will likely come back again, looking for another one. The loss leader is a time-honored business strategy that works. Use it to build your customer base and your reputation.
Do you have a question about the Loss Leader Pricing Strategy? Connect with a mentor online or in your community today!