Loss Leader: The Strategic Pricing Tool In Marketing

Overview 

Marketers around the globe, employ several marketing strategies to boost their business profits. Loss leader pricing is also one of those marketing strategies. It involves selecting one or more retail products to be sold below cost or simply at a loss to the retailer. This is done to entice new customers and broaden the consumer base. Loss leader marketing strategy is more of a gamble as there is an equal probability of it being successful as well as unsuccessful. It all depends upon how the customers perceive your offerings. 

Definition Of Loss Leader 

The term "Loss Leader" refers to a pricing methodology in which a product is sold at a price that is below its Market Cost. This marketing gimmick is mostly employed to catalyze other sales of products that are more profitable. As per this Sale Promotion – Marketing Strategy, the term "Leader" is utilized as a related terminology that can mean any popular article. Such an article can be sold at a normal price. Loss Leaders can turn out to be crucial aspects of firms' marketing strategies, especially during the time of dumping campaigns. 

Characteristics of Loss Leader 

Some characteristics of a Loss Leader can be mentioned as follows: 

• A Loss Leader is believed to be a product that customers buy quite often; thus, they are aware of the fact that it usually being at a low price is a bargain.
• It is to be noticed that a few Loss Leader Products are perishable so they cannot be stockpiled.
• In the case of Loss Leader, the retailer will usually limit how much a customer can buy. 

The Purpose Of Loss Leader Strategy 

As mentioned earlier, a loss leader strategy suggests that a business sells a product at a zero or negative profit margin so as to entice new customers. This is done with the hopes that these new customers will purchase items with a high margin, according to small business expert Steve Strauss of "USA Today." Apart from enticing new customers, a loss leader marketing strategy is also employed for the purpose of launching a new product or service to attract consumers from existing providers.

How Does The Loss Leader Work? 

At a glance, it may seem that such a pricing strategy would destroy the profitability of a store. However, the loss leader pricing strategy works effectively if executed properly. 

The rationale behind the strategy is to price certain products below costs to draw more traffic from other competitors and ultimately generate more sales on other products. The strategy is common in the marketplace as businesses introduce new customers to an extremely cheap product or service in the hope of building a large customer base and long-term recurring revenue. 

Advantages and Disadvantages Of Loss Leader Strategy 

Loss leader strategy comes with its fair share of advantages and disadvantages. Here are all the benefits and losses that a business has to face when employing a loss leader strategy. 

Advantages: 

• Helps to get rid of outdated stock 

As a matter of fact, not everything in a store gets sold. This causes an accumulation of old and outdated stocks. In such a case, adopting a loss leader pricing strategy, not only helps move out this outdated stock but also helps boost the sales. 

• Stimulates the sales of other products 

When marketers play smart while choosing their loss leaders and complementary products, they can actually succeed in stimulating the purchases of other items in their store. 

• Broadens customer base 

When a business is about to introduce new products, employing loss leader strategy plays a major role in enticing and driving in new customers. This eventually helps in increasing total sales. That's because when customers visit the store to purchase the product available at lower than wholesale price than they may also consider buying other shelf products.  

Disadvantages 

• Customer dissatisfaction 

There are instances when loss leader products get sold in a jiffy. As a result, a majority of customers are left dissatisfied as they do not find the product at the advertised price resulting in dissatisfied customers. In such cases, customers may not buy even a single product, resulting in a loss to the business. 

• Loss leader may come across as a cheap product 

The loss leader marketing strategy can't always be beneficial for a business. As they say:

Excess of everything is bad.

Similarly, overusing the loss leader strategy can blur the lines between a great deal and a cheap product. This may cause the customers to perceive your offering as "cheap", and they will simply steer clear of a product they believe to be low quality. 

• Cherry picking 

When buyers purchase a business' loss leader product without buying any other product, it is called cherry picking. This is one of the biggest disadvantages of loss leader marketing strategy. 

• Loss-making Decision 

As mentioned above, the loss leader strategy may not always be beneficial. It may also be a big flop in case the store is unable to attract new customers, and its sales do not increase. This would eventually lead to a loss as a reduction in the price of products will shrink the margins of the store. 

Examples Of Loss Leader 

• Example 1: 

An interesting example of a Loss Leader can be that of Perishable Food. Many supermarkets sell Perishable food items like Milk and Sugar at a cost that is less than their purchase cost for attracting consumers towards their business. These products are strategically placed far away from the entrances of these supermarket stores to enhance this Loss Leader Effect. 

• Example 2: 

Another example of a Loss Leader can be that of Video Games. It is believed that video games have been sold at a loss during their launch or even a couple of years after their launch with the aim of obtaining the most quantity of units to consumers. Further, console manufacturers recover their money from the royalties that result from software sales. 

That was a basic idea about the loss leader marketing strategy. This can be helpful for someone new to marketing. However, the students pursuing a higher degree in marketing need to have an in-depth knowledge of loss leader and related concepts. That's important to achieve academic excellence. For this, students can rely on books written by top experts, online resources or notes from lectures. Here's a list of the most preferred books when it comes to marketing topics like "Loss Leader": 

Loss Leader seems to look like a simple pricing method, but it needs a thorough understanding of marketers. Thus, marketers can refer to details of some related textbooks as follows: 

• Report on an inquiry into loss-leader selling by Canada, Restrictive Trade Practices Commission (Published by Department of Justice – the Year 1955).
• Managerial Economics (Published by FK Publications). 

In case, these resources are a bit too confusing for the students; they can simply opt for a reliable online assignment help service like Myassignmenthelp.com. 

How Can MyAssignmentHelp.Com Writers Help Regarding Loss Leader? 

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• Our marketing writers help students during their essay completion or dissertation project regarding Loss Leader Issues like Stockpiling discouraging.
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