Loss Leader Pricing Strategy – All You Need to Know

23 September 2021 - 14:24, by , in Best practices in price monitoring, Comments off
Reading Time: 9 minutes

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

What is Loss Leader Pricing?

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.

Use Cases of Loss Leader Pricing

Let’s now take a look at some common cases when retailers might resort to a loss leader pricing strategy.

Complementary products

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. 

Products with a short shelf-life/expiration date

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. 

Increasing Market Share

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. 

Seasonal Occasions

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. 

Examples of Loss Leader Pricing Implementation

Gillette

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

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:

  1. Undercut Ford – their main competitor at that time
  2. Get the price under £500 so psychological pricing would be in effect
  3. Most importantly – attract customers to their other, more profitable, models

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

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. 

Amazon

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 Kindle

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.

PlayStation & Xbox 

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. 

Benefits and Drawbacks of Loss Leader Pricing

Benefits

  • Increased sales (especially of other products in your store) – this is the main purpose of loss leader pricing strategy. It’s used because, if enough sales are generated on other, more profitable products, they can cover and overcome the losses from the loss leader. And the purpose of a loss leader product is to attract your customers to those profitable products, either by its clever placement in the store or by being a part of a complementary product line.
  • Market penetration – you can think of loss leader pricing as a form of penetration pricing or introductory pricing when used to enter new markets. This can either take the form of the already mentioned heavily discounted loss leader or even go as far as offering free samples of a certain product. Free samples can also have a psychological effect—they may entice customers to “give back” to the brand by later on purchasing a product at the full price. 
  • Brand awareness & loyalty – if pulled off right, loss leader pricing can make your customers associate your store with a certain product and make them purchase it at your stores by default. It comes down to the perceived value you provide. If your customers think that you provide a fair (or even more than a fair) price, they’ll keep coming back. By such repetition, your brand can start permanently residing in the back of their minds. Once you get to this point, it’s advisable to start thinking more deeply about your brand’s voice and values so you can connect with your customers on an even deeper level.

Drawbacks

  • Cherry-pickers – one could say that most of the downfalls and risks of loss leader pricing strategy stem from this type of consumer. What are cherry-pickers? Essentially, they are a type of consumer who actively goes on deal hunting, not buying (almost) anything that’s not on a sale/discount. If you attract this type of consumer with your loss leader pricing strategy, you may be in danger. They are most likely to visit your store, buy the loss leader, and head out. This leaves you at a net loss. Now, a couple of cherry-pickers won’t do you any harm, but if you attract them en masse you may experience significant losses. 
Cherry-picking
  • Deteriorating brand image – if you use loss leader pricing strategy too often your brand may start building up a cheap image. If every time there’s something being sold at a heavy discount, customers may start thinking about your brand in terms of low prices – which are easily linked to low quality in the mind of the consumers. This then poses a risk of losing a part of your customer base.

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. 

  • Legality and controversies – in some states in the US and some countries around the world this practice is outlawed. Also, it’s controversial because it’s considered predatory and extremely aggressive in nature by some people. This is based on the fact that larger businesses can use this pricing strategy more easily than small and medium ones, which is what we talk about next.
  • Not being able to cover losses – as we have already mentioned, there is a risk that loss leaders won’t motivate your customers to buy additional products and may therefore generate losses. This is especially important for SMBs, who can’t afford to absorb losses as much as large corporations do. Here also lies one of the reasons why this pricing strategy is considered predatory in nature by some—it is very suitable for driving smaller competitors out of business and it can be used as a gatekeeping strategy barring new competitors from entering the market.
  • Customers getting used to discounts – if you discount certain products too often, your customers may get used to the discounted price so much, that they won’t be willing to purchase that product at its regular price! Combine this with the previously mentioned risk of your brand image deteriorating and you may end up in a situation where customers buy the full-priced product in your competitor’s store but not at yours. This is why you should use a price monitoring tool, such as Price2Spy, so you know how often and to what extent your competitors use loss leader pricing strategy.

How to recognize Loss-Leader with the help of Price2Spy

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. 

Price2Spy explanation through example

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.

Price2Spy explanation through example
Price2Spy explanation through example

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.

Conclusion

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!

 

About Price2Spy

 

Price2Spy is an online service that provides comprehensive and suitable solutions for eCommerce professionals including; retailers, brands/manufacturers and distributors in order to stay profitable in the current competitive market conditions. If you want to learn more about what Price2Spy can do for your business, please get a personalized free demo or start your 30-day free trial.

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This blog is a place for eCommerce professionals to discuss ideas, methodologies and strategies to compete more effectively in the ever more tightening world of online retail. We explore things like competitive price monitoring, competitor business intelligence, competitive pricing, and counter-intelligence in general.

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