Retailers today resort to many, what is commonly called, “tricks” in order to attract customers. Some of them seem logical and some counterintuitive, even. To many of you, loss leader pricing may be just one of such “tricks”.
But, it’s not a trick at all. It’s a viable pricing strategy that has its own logic and purpose. In this article, we’ll explain what loss leader pricing is, when should a retailer apply it, provide you with some examples, and list out the benefits and drawbacks of implementing this pricing strategy.
Finally, we will give an example of how Price2Spy can be used to detect one such case. Keep reading if you want to learn more about it!
Loss leader pricing is a pricing strategy that at its core means selling one of your products (the loss leader) below the price at which you bought it in order to attract customers to your other products. The loss leader does not generate profit—on the contrary, it’s a product that is in most cases unprofitable. Sounds pretty counterintuitive, so what’s the fuss about?
Here comes the main idea behind this pricing strategy—retailers who rely on loss leader pricing expect customers to buy other products (that do generate profit) while they’re in the store (or on your website). It’s much more convenient for customers to purchase products at the same place than to go around different stores, spending additional time looking for the best deals.
You are now perhaps thinking – “Convenience and saving time – sound good enough for brick and mortar stores, but what about online shops?” Well, you may be surprised to find out that even the largest eCommerce platforms, like Amazon, are using loss leader pricing strategy! But, more on this later, when we get to the examples of how this pricing strategy is used in practice.
Also, loss leader pricing may be used when a retailer wants to attract more customers. This can happen when retailers are trying to expand their current market share or when arriving at a new market. When you put things this way, you can look at loss leader pricing as a form of penetration pricing strategy.
Let’s now take a look at some common cases when retailers might resort to a loss leader pricing strategy.
Complementary products are products that are in most cases bought together with another product, without which their utility significantly diminishes. Usually, you have 1 main product and the rest are complementary. For example, printers and cartridges, cars and gas (or maybe even a different type of renewable energy resource), or even a phone and a SIM card—these are all combinations of products that go “hand in hand”, and are difficult (if not impossible) to use one without the other.
Milk, yogurt, eggs—these are all products that people tend to buy very frequently. This means these products are what keeps the customers coming back to the store in the most reliable way. It’s hard, however, not to notice how there’s always some brand of milk at a discount. You also may have noticed how you always have to walk around the shelves, probably to the furthest point in the store from the entrance, just to get to that milk. There is a reason for that.
Namely, in that case, the discounted milk acts as a loss leader, and its deliberate placement at the back of the store has a purpose. It’s placed there so that, while you’re going towards the shelf with milk, you can take a look at other attractive (and, most importantly, profitable) articles and add them to your cart as well.
We briefly touched upon this – loss leader pricing is an aggressive pricing strategy that can kickstart your market expansion. And it is no secret that (a large majority of) businesses are looking to grow and expand their market share and attract new customers. It’s a part of everyday business life.
On holidays such as Black Friday, steep discounts are the name of the game. That large TV at 80% discount is hard to miss, to say the least, at the end of the store. It’s made sure to be prominently displayed and in a way it resembles a trophy towards which consumers race, literally in some cases.
After they’ve got their hands on the TV (or any other heavily discounted product), customers will most likely feel a sense of relief, and they’ll start browsing other shelves. That’s when they might stumble upon another product, which could be potentially profitable.
Also, even in the case that the TVs get grabbed and sold out before some customers reach them, this pricing strategy still did what it was supposed to do. It’s just that now instead of feeling relieved, customers may start browsing shelves out of frustration looking for the next best deal.
Gillette’s use of loss leader pricing strategy is now a well-known thing. They may not be the ones who invented it, but there are few other companies that can say they’ve achieved similar results with it. So, what did Gillette do?
They started selling their razors at a drastic discount, sometimes even with some razor blades included in the package. Afterward, they sold razor blades replacements separately, earning a significant profit on them. Also, this introduced customers to other Gillette products, such as deodorants, shaving gels, etc.
MINI’s attempt to use the loss leader pricing strategy is also famous, but not for its success (at least not completely). According to Wikipedia British Motor Corporation was in 1959 selling Mini’s basic model at a £30 loss per unit. Three things were important for them:
Unfortunately, this didn’t work out for BMC because that model of MINI kept being the bestseller (at a loss) for many upcoming years.
Printers and cartridges are, as we have already mentioned, examples of complementary products. But, it’s not the printers that make a profit. Usually, printers themselves are sold at a loss. It’s the cartridges that bring in the profits, and their recurring sales.
We can find examples of loss leader pricing strategy usage by Amazon in at least two cases: Kindle and prime subscriptions. Kindle is an e-reader on which you can store and read electronic books. Kindle itself is often sold at a loss, but the eBooks are what brings in the profits.
Amazon’s Prime subscription is a monthly paid service that gives its users certain benefits unsubscribed users don’t have access to. Even though it seems like a relatively straightforward program, its logic is rather complex. However, one of the expectations Amazon has is that Prime users will be more prone to purchasing additional products if they have access to benefits like free and quick delivery or special deals.
The cost of research and development, production, and marketing which is needed for making and promoting a new generation of gaming consoles (PlayStation and Xbox being the most popular ones) can hardly be covered solely by console sales. What covers these costs and brings in the profits are the games which are sold separately. Also, more recently, we have witnessed an introduction of different subscription models (eg. PlayStation plus) for these gaming platforms, that also lure in more customers.
This is why it’s important to use this pricing strategy as a short-term means and not too frequently. What “too frequently” means is up for debate and depends on your customers as well as on your business, so it’s you, as a business owner, who will have to make this decision.
Let’s go through an example of how exactly Price2Spy helps you recognize loss leaders at your competitors.
First of all, you’ll be able to see if a competitor you’re monitoring has a (drastically) lower price for a certain product than you or other competitors who stock the same product.
Afterward, you’ll be able to check if that same competitor has higher prices for some other products for which it is safe to assume they’ll be bought together with the discounted product.
If you notice these two things happening, then you can be pretty much sure that your competitor is using the loss leader pricing strategy. In our example from the images above, we can be certain that Competitor #1 is using loss leader pricing strategy and that his loss leader product is Product A.
Also, you’ll have access to historical data (from the moment you’ve created your account and started monitoring prices) so you’ll be able to see when exactly did they start using this pricing strategy.
In this article, we’ve covered what loss leader pricing strategy is, when it should be used and how, given you some examples of its successful and unsuccessful implementation, and lastly listed out the most important pros and cons of this pricing strategy.
The main takeaway here is to be very cautious when thinking about implementing loss pricing strategy on a certain product you’re selling. You need to think about which product will be a loss leader, how long will you be using this pricing strategy, and what do you want to achieve with it.
Also, perhaps even most importantly, you need to be aware of what your competition is doing. Are they using this pricing strategy or maybe something else, and what kind of results is it bringing them?
This is all made possible and easy by Price2Spy – a price monitoring tool that can make your life as a business owner so much easier. The best part – there’s a free trial with no strings attached! There’s no reason to wait, so hurry up and see how it can help your business grow and expand!