There are various pricing strategies that businesses use to make themselves more profitable. One of those is called ‘loss leading’. 

A ‘loss leader’ is a product priced below cost, in order to get customers to spend more overall. This could be on one particular visit, or result in a continued revenue stream. 

If you’re interested in using this strategy to improve your business’s revenue, then keep reading. 

In this article, we’ll explore:

  • What are pricing strategies?
  • What is a loss leader pricing strategy?
  • Why use loss leading strategies?
  • What are the downsides of a loss leader strategy?
  • Who should use a loss leader strategy?

What are pricing strategies?

Businesses constantly try to use clever methods to earn more money. Sometimes that involves changing the price of certain products to lure in more customers or get them to buy more things. 

There is also a price skimming strategy, which involves starting a product at a higher price and reducing it over time. 

What is a loss leader pricing strategy?

Loss leader pricing is a strategy where a business deliberately sells a certain product for less than they paid. This product is designed to either get people in the store, or make a purchase with future costs attached

If it’s bringing customers in-store, it’s usually placed right at the back. That way, the customer has to walk past other products to get what they want, and will probably pick up some extra items on the way. 

Why use loss leading strategies?

There are a few reasons why a business may want to use a loss leader pricing strategy. We’ve listed the top benefits below.

Increase sales

The main point of loss leaders is to increase the total amount of sales for the business. When used effectively, that’s exactly what this strategy does. 

By tempting customers to visit and buy more than they intended, you’re increasing the total revenue flowing into the business. 

Attract more customers

Changes in pricing also affects demand. The theory is called ‘price elasticity of demand’, and it basically means: 

The lower a product’s price, the more people will want to buy it. 

So by making a product less expensive, it becomes more desirable to a wider audience. This increases your consumer base, and can lead to improved sales in the long-term too.  

Builds customer loyalty

If you want to maximise customer loyalty, you could try making your lower prices exclusive to regular customers

A real-world example of this is the Tesco Clubcard. Clubcard prices are available on certain products, and these are often drastically lower than the regular price. Since these prices are only available to clubcard holders, Tesco builds a more loyal customer base. 

Your small business doesn’t have the same resources as a massive corporation. Even still, you can find ways to use the method that better suits your business model. 

Though if you do implement it, make sure you stay aware of ‘cherry pickers’. They are one of the biggest downsides of using a loss leader strategy. 

What are the downsides of a loss leader strategy?

Using a loss leader strategy isn’t guaranteed to increase your sales. In fact, there are a couple of downsides to consider before implementing the strategy in your business.

Cherry picking

A ‘cherry picker’ is a shopper who only purchases the lowest priced items and the best deals. They’ll come in, buy just your loss leader, and leave. 

Cherry pickers are a major issue for the loss leader strategy, because they end up costing your business money. Since they don’t purchase anything else, you’ll never recoup the cost of your discounted product

Bulk buying

Next to cherry picking is bulk buying or stockpiling. This is when customers specifically purchase a large amount of your discounted product. 

Since one customer buys it all, there’s now no incentive for other shoppers to come in. Where many shoppers could have offset the cost by buying other products, they no longer can.

Fortunately, there is a way to handle this. For example, you could impose limits on how much a customer can purchase. This reduces a customers ability to bulk buy, and can prevent cherry picking too.

Who should use a loss leader strategy?

Of course, using a loss leader strategy isn’t suitable for every business. Some will be more effective than others, while certain businesses may not see any positive effects. 

Online retail businesses, for example, may not benefit from a loss leader strategy. That’s because they can be even more prone to cherry pickers than bricks and mortar businesses. 

Even if you get some shoppers willing to purchase other products, many more will visit your website just to take advantage of your loss leader.  

Opportunities

While the usual example is about bringing people into your store, loss leader strategies can focus on creating longer revenue streams too

For example, games consoles (like the PS5) are frequently sold at a loss. That’s because the businesses behind the consoles make money from game sales instead. 

By reducing the price of the console, more people will buy it — meaning more customers purchasing their games. 

Think about how you could use similar strategies in your business. If you sell a product that needs replacement parts, try selling it at a discounted price. Customers will need to buy the replacement parts to keep using the product, and you’ll be able to charge slightly more for them. 

Monitoring the effectiveness of loss leader strategies

It’s no good putting these strategies in place and then not thinking about them again. Like checking the metrics for your social media strategies, you need to keep an eye on your financial metrics.

This doesn’t need to be a time-consuming activity though. As a two-in-one business current account and accounting software, the Countingup app is perfect for monitoring your money. 

There’s a couple of other features that you can make use of too, like automatically categorising your business expenses. 
But don’t just take our word for it, download the app for free and see if you like it!