What is a loss leader?
Last modified: 2018/08/10 | Approximate reading time 2 mins
This article looks into our pricing strategy series by offering an additional view of this aspect: what is a loss leader?
In order to work, this strategy must take into consideration two very important things:
- the company must have a range of products/services. This strategy cannot work with a single product/service company.
- one or more of the products/services are known and have some value for the buyers.
What is unique here is the fact that the pricing strategy is considered as a whole, rather than individually. In our previous articles, we looked at some of the strategies to set a price for an individual product/service. Here we look at a set group of products/services and how to use certain components to maximize the total sales for the company.
We should define what a loss leader is. A loss leader is a product/service that is known to your customers and that holds value for them. The strategy is to offer a discount on this product/service to attract consumers to buy not only this item but the rest of the products/services that are needed with it, or needed to complete the loss leader. Let us look at some examples because this strategy is widely used.
Printer manufacturers may be one of the best examples of this. The price of printers is very low to facilitate the purchase (the printer is the loss leader). On the other hand, the price of ink cartridges is comparatively expensive. The strategy is, therefore, to get the consumers to buy the printer, which will create a captive market (captivity is relative since some alternatives exist), and sell goods that are essential to the functioning of the item (the ink cartridges). Bingo!
Here is another example of loss leader usage: supermarkets. What we have here are distributors, not manufacturers, which should contrast with our previous example. The way this strategy is used here is to take key commodities from the consumer’s basket and offer them at a lower price than the competition to attract customers. The aim is to ensure that customers do not buy exclusively the items on sale, but all of their other needs too. The supermarket will have an opportunity to get back its discounted prices with items that are either at regular prices or even a little more expensive than the competition.
A final example is the service industry. I get regular calls from portfolio manager representatives who offer me an analysis of my assets to see if there aren’t a few things they could do better. The analysis itself takes time and costs money for the company, but it is offered to me for free. This is the loss leader. Once you know whether you are well-equipped or not, you have entered the sales process of the company.
How can this strategy be used in your business? The best way is to analyze all your products/services and find out if you have an element that could be discounted, which would trigger the purchase of other products/services. One of the techniques used to identify this is to draw a schematic chart of your client's transformation process. The loss leader could be located at the beginning of this process. Having identified this product/service, you will attract your customer and you will be able to recuperate your discount with the purchase of other products/services.
If you have any questions or comments about this article, please do not hesitate. Happy thinking.