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Loss leader
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A loss leader or leader is a product sold at a low price (at cost or below cost) to stimulate other, profitable sales. It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. The price can even be so low that the product is sold at a loss. A loss leader is often a popular article. Sometimes leader is now used as a synonym for loss leader and means any popular article, in other words one sold at a normal price.
use of a loss leader is to draw customers into a store where they are likely to buy other goods.
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Encyclopedia
A loss leader or leader is a product sold at a low price (at cost or below cost) to stimulate other, profitable sales. It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. The price can even be so low that the product is sold at a loss. A loss leader is often a popular article. Sometimes leader is now used as a synonym for loss leader and means any popular article, in other words one sold at a normal price.
Sales of other items in the same visit
One use of a loss leader is to draw customers into a store where they are likely to buy other goods. The vendor expects that the typical customer will purchase other items at the same time as the loss leader and that the profit made on these items will be such that an overall profit is generated for the vendor.
Loss Lead describes the concept that an item offered for sale at a reduced price and is intended to lead to the subsequent sale of other items, the sales of which will be made in greater numbers, or greater profits, or both. It is offered at a price below its minimum profit margin-- not necessarily below cost. The firm tries to maintain a current analysis of its accounts for both the loss lead and the associated items, so it can monitor how well the scheme is doing, as quickly as possible, thereby never suffering an overall net loss.
An example is a supermarket selling sugar or milk at less than cost to draw customers to that particular supermarket.
Marketing academics have shown that retailers should think of both the direct and indirect effect of substantial price promotions when evaluating their impact on profit. To make a very precise analysis one should also include effects over time. Deep price promotions may cause people to bulk-buy (stockpile), which may invalidate the long-term effect of the strategy. This is the association rule analysis.
When automobile dealerships use this practice, they offer at least one vehicle below cost and must disclose all of the features of the vehicle (including the VIN). If the loss leader vehicle has been sold, the salesperson tries to sell another vehicle at the regular price. A customer who has missed the loss leading vehicle is unlikely to find a better deal elsewhere. This practice can be seen as a form of deceptive advertising, and is illegal in some jurisdictions. It falls under the strategy of bait and switch deception tactics.
Characteristics of loss leaders
- A loss leader may be placed in an inconvenient part of the store, so that purchasers must walk past other goods which have higher profit margins.
- A loss leader is usually a product that customers purchase frequently—thus they are aware of its usual price and that a lower price is a bargain.
- Loss leaders are often scarce, to discourage stockpiling. The seller must use this technique regularly if he expects his customers to come back.
- The retailer will often limit how much a customer can buy.
Some examples of typical loss leaders include milk, eggs, rice, socks and other inexpensive items that grocers wouldn't want to sell without other purchases.
Examples
The razor and blades business model, pioneered by American businessman King Gillette, is similar to the loss leader business model. Razor handles are given away for free or sold at a loss, but sales of disposable razor blades are very profitable.
This practice is commonly used with video game console makers that sell their products at very low margins, or even at a loss, to achieve a higher market share. They rely on the profits from sales of video games. They also receive licensing fees from other companies. Microsoft used this technique with the Xbox and Xbox 360. Sony did the same with the PlayStation 3 and its forerunner, the PlayStation 2. None of these have yet made a profit of themselves).
Nintendo's Wii is made more cheaply and does turn a profit, and of course Nintendo also gets software licensing fees. The NES was the most successful loss leader console to date.
As with any mass product, as game consoles get older the price of them drops, because the tooling and distribution is already there. Makers can then choose either to make a profit on them (or reduce losses), or lower prices to make them more attractive, which may make them a loss leader again.
In 1979, American businessman Earl Muntz decided to sell blank tapes and VCRs as loss leaders to attract customers to his showroom, where he would then try to sell them highly-profitable widescreen projection TV systems of his own design. His success continued through the early 1980s.
Inkjet printers are also often sold to retail customers below their margin price and could also be viewed as loss leaders. Some of the printers, especially the entry-level models, are sold at a loss-leading price which seems apparently affordable to most consumers, but they pay the regular price for ink cartridges and specialty papers supplied by the manufacturer. Many consider printer manufacturers activities surrounding their printers' ink anti-competitive.
Cell phones are offered for free or at a low cost to subscribers who enter into a contract that is typically between 12 and 24 months. The carriers profit by retaining customers for a longer period of time, and this offsets the cost of the device. These artificially lowered prices make it difficult for those selling standalone devices and unlocked handsets to compete.
Gasoline (UK: Petrol) is often considered a loss leader for the convenience stores and service stations attached to them, especially when the crack spread is close to zero or even negative. These stores rely on sales of food products and other items that bring a higher profit margin. The opposite model is sometimes to sell loss leader cigarettes and overpriced petrol and/or foods and beverages. But the seller must think of how large and stable the market is. A service station has a sure and steady margin that will not disappear because of changes in prices, and with the enormous volumes that flow though the pumps small margins can bring in considerable amounts of money.
While music albums are sold at a profit by publishers, many of the musicians contracted to create their contents gain little or no money from album sales and broadcasting rights. Artists may see music sales only as publicity for concerts, from which they earn their main income.
Dealers who normally use "fruitshop" style trading methods – stocking small quantities of a variety of products – cannot compete with loss leaders by negotiating to buy larger quantities of consumables at a lower price; because they still have to sell at a loss to be competitive.
Loss leaders can be an important part of companies' marketing and sales strategies, especially during dumping campaigns.
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