Loss Leader
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A loss leader (also leader) is a
pricing strategy A business can use a variety of pricing strategies when selling a product (business), product or Service (economics), service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's p ...
where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services. With this
sales promotion Sales promotion is one of the elements of the promotional mix. The primary elements in the promotional mix are advertising, personal selling, direct marketing and publicity/public relations. Sales promotion uses both media and non-media marketin ...
/
marketing Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
strategy, a "leader" is any popular article, i.e., sold at a low price to attract customers. 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" is an item offered for sale at a reduced price that is intended to "lead" to the subsequent sale of other services or items. The loss leader 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 to avoid an overall net loss.


Strategy

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 Association rule learning is a rule-based machine learning method for discovering interesting relations between variables in large databases. It is intended to identify strong rules discovered in databases using some measures of interestingness.Pi ...
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 a more upscale trim of that vehicle at a slightly discounted price, as a customer who has missed the loss-leading vehicle is unlikely to find a better deal elsewhere. Loss leaders can be an important part of companies' marketing and sales strategies, especially during "dumping" campaigns.


Characteristics

*A loss leader may be placed in an inconvenient part of the store, such as at the rear of the store, so that purchasers must walk past other goods that have higher
profit margin Profit margin is a measure of profitability. It is calculated by finding the profit as a percentage of the revenue. \text = = There are 3 types of profit margins: gross profit margin, operating profit margin and net profit margin. * Gross Pro ...
s. *A loss leader is usually a product that customers purchase frequently—thus they are aware that its unusually low price is a bargain. *Loss leaders are often scarce or provided with limits (e.g., maximum 10 bottles) to discourage stockpiling and to limit purchases by small businesses. The seller must use loss leaders regularly if they expect their customers to come back. *Some loss leader items, such as fruits, vegetables and pastries, are perishable and cannot be easily stockpiled by customers. *Some loss leaders, rather than being advertised as bargains, are high-end, costly products offered below profit margin to enhance the company's prestige and/or to attract "lookers" or "window shoppers" who may buy other less expensive but more profitable merchandise. For example, if a
pawnshop A pawnbroker is an individual or business (pawnshop or pawn shop) that offers secured loans to people, with items of personal property used as collateral. The items having been ''pawned'' to the broker are themselves called ''pledges'' o ...
offers a
Harley-Davidson Harley-Davidson, Inc. (H-D, or simply Harley) is an American motorcycle manufacturer headquartered in Milwaukee, Wisconsin, United States. Founded in 1903, it is one of two major American motorcycle manufacturers to survive the Great Depressi ...
motorcycle in its display window at below the normal profit-making cost, this motorcycle will generate a lot of walk-in traffic during the period before it is sold. These shoppers may end up using the store's other services or making other purchases. Some examples of typical loss leaders include milk, eggs,
rice Rice is the seed of the grass species ''Oryza sativa'' (Asian rice) or less commonly ''Oryza glaberrima ''Oryza glaberrima'', commonly known as African rice, is one of the two domesticated rice species. It was first domesticated and grown i ...
, and other inexpensive items that grocers would not want to sell without the customer making other purchases. While some customers may have the discipline to only buy the loss leaders, the loss leader strategy works because a customer who goes into a grocery store to buy an inexpensive bread or milk item may decide to buy other grocery items.


Examples


Record albums

The ''Warner/Reprise Loss Leaders'' were a series of promotional sampler
compilation albums A compilation album comprises Album#Tracks, tracks, which may be previously released or unreleased, usually from several separate recordings by either one or several Performing arts#Performers, performers. If by one artist, then generally the tr ...
released by
Warner Bros. Records Warner Records Inc. (formerly Warner Bros. Records Inc.) is an American record label. A subsidiary of the Warner Music Group, it is headquartered in Los Angeles, California. It was founded on March 19, 1958, as the recorded music division of the ...
throughout the 1970s. Each album (usually a 2-record set) contained a wide variety of tracks by artists under contract to Warner Bros. and its subsidiary labels (primarily
Reprise Records Reprise Records is an American record label founded in 1960 by Frank Sinatra. It is owned by Warner Music Group, and operates through Warner Records, one of its flagship labels. Artists currently signed to Reprise Records include Enya, Michael ...
); often these were singles, B-sides, non-hit album tracks, or otherwise obscure material, all designed to arouse interest in the artists' regular albums. Warner advertised the Loss Leaders albums by inserting special illustrated
inner sleeves Interior may refer to: Arts and media * Interior (Degas), ''Interior'' (Degas) (also known as ''The Rape''), painting by Edgar Degas * Interior (play), ''Interior'' (play), 1895 play by Belgian playwright Maurice Maeterlinck * The Interior (novel ...
in all of its regular album releases, listing all of the currently available Loss Leaders and including an order form. Each loss leader double album was priced at US$2, significantly less than a comparable regular-release double album of the time. The first Loss Leaders compilation was ''The 1969 Warner/Reprise Songbook'', featuring a wide range of artists from
Miriam Makeba Zenzile Miriam Makeba (4 March 1932 – 9 November 2008), nicknamed Mama Africa, was a South African singer, songwriter, actress, and civil rights activist. Associated with musical genres including Afropop, jazz, and world music, she w ...
to
The Mothers of Invention The Mothers of Invention (also known as The Mothers) was an American rock band from California. Formed in 1964, their work is marked by the use of sonic experimentation, innovative album art, and elaborate live shows. Originally an R&B band ...
; the last of the original series was the
punk Punk or punks may refer to: Genres, subculture, and related aspects * Punk rock, a music genre originating in the 1970s associated with various subgenres * Punk subculture, a subculture associated with punk rock, or aspects of the subculture s ...
and new wave-themed ''Troublemakers'' in 1980.


Video cassettes

In 1979, American businessman Earl Muntz decided to sell blank tapes and
VCRs A videocassette recorder (VCR) or video recorder is an electromechanical device that records analog audio and analog video from broadcast television or other source on a removable, magnetic tape videocassette, and can play back the recordin ...
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.


Automobiles

Chevrolet Chevrolet ( ), colloquially referred to as Chevy and formally the Chevrolet Motor Division of General Motors Company, is an American automobile division of the American manufacturer General Motors (GM). Louis Chevrolet (1878–1941) and ous ...
's
Corvette A corvette is a small warship. It is traditionally the smallest class of vessel considered to be a proper (or " rated") warship. The warship class above the corvette is that of the frigate, while the class below was historically that of the slo ...
was originally intended in the 1950s to be an "image builder" and loss leader for
General Motors The General Motors Company (GM) is an American Multinational corporation, multinational Automotive industry, automotive manufacturing company headquartered in Detroit, Michigan, United States. It is the largest automaker in the United States and ...
, the idea being that men would go to showrooms to look at this "automotive Playboy Bunny"—which they knew they could not afford—and end up purchasing a lower-cost model. However, it enjoyed significant sales successes in the 1960s and produced a substantial annual profit. On its launch in 1959 the British Motor Corporation's
Mini The Mini is a small, two-door, four-seat car, developed as ADO15, and produced by the British Motor Corporation (BMC) and its successors, from 1959 through 2000. Minus a brief hiatus, original Minis were built for four decades and sold during ...
car was sold at a starting price (including taxes) of £496 for its most basic model, and it was estimated that BMC lost £30 per car sold at this price. However, the headline-grabbing price was significantly lower than that of the car's contemporary rival, the
Ford Anglia The Ford Anglia is a small family car that was designed and manufactured by Ford UK. It is related to the Ford Prefect and the later Ford Popular. The Anglia name was applied to various models between 1939 and 1967. In total, 1,594,486 Anglias ...
—indeed the only cheaper four-wheeled, four-seater car on the British car market at the time was very basic and old-fashioned
Ford Popular The Ford Popular, often called the Ford Pop, is a car from Ford UK that was built in England between 1953 and 1962. When launched, it was Britain's lowest priced car. The name Popular was also used by Ford to describe its 1930s Y Type model. Th ...
, which sold for only £2 less than the basic Mini. While BMC lost money on every basic Mini sold, such cars were unattractive to many buyers since they lacked features such as heaters, floor carpets and opening rear windows and BMC priced the better-equipped models (which cost from £537) to make a small profit, using the basic car as a loss-leader to allow the promotion of a starting price below the significant £500 mark and to make the Mini at least appear to undercut its main rival on price. The ploy did not work entirely as BMC intended—even in its most basic form, the Mini was far superior in many areas to its rivals while also being lower in price. BMC sold far more basic Minis than it had anticipated, meaning that it sold many Minis at a significant loss. Despite the car being a bestseller in Britain (and several other markets) it made little to no profit for many years.


Perishable food

Supermarket A supermarket is a self-service Retail#Types of outlets, shop offering a wide variety of food, Drink, beverages and Household goods, household products, organized into sections. This kind of store is larger and has a wider selection than earli ...
s sell food staples such as bananas or
milk Milk is a white liquid food produced by the mammary glands of mammals. It is the primary source of nutrition for young mammals (including breastfed human infants) before they are able to digestion, digest solid food. Immune factors and immune ...
at less than the cost at which they were purchased in order to draw customers to their business. These items are typically strategically placed far from the entrances of the store to enhance this effect. In the case of milk, supermarket chains often refuse to pay market rates to avoid making a loss.


Diapers/nappies

Many toy store chains and online retailers sell diapers or nappies as a loss leader in order to entice parents into the store in the hopes that the children will spot toys, bottles or other items that the family "needs".


Hardware/tool stores

Large hardware stores often sell larger tools, such as drills or electric saws at cost or below. They do this expecting customers to buy accessories such as blades, drill bits, stands, or cases, along with the new tool. These items tend to have a much higher profit margin, and are often impulse buys.


Smartphones and mobile electronics

Some consumer electronics stores use smartphones and other mobile electronics as loss leaders. The company makes less profit on the smartphone or mobile device, but they make up for this by the sales of higher-profit accessories such as cases, headphones and power adapters.


Home video game consoles

Gaming consoles A video game console is an electronic device that outputs a video signal or image to display a video game that can be played with a game controller. These may be home consoles, which are generally placed in a permanent location connected to a ...
, such as the
Xbox 360 The Xbox 360 is a home video game console developed by Microsoft. As the successor to the original Xbox, it is the second console in the Xbox series. It competed with Sony's PlayStation 3 and Nintendo's Wii as part of the seventh generation ...
/
PlayStation 3 The PlayStation 3 (PS3) is a home video game console developed by Sony Interactive Entertainment, Sony Computer Entertainment. The successor to the PlayStation 2, it is part of the PlayStation brand of consoles. It was first released on Novemb ...
or
Xbox One The Xbox One is a home video game console developed by Microsoft. Announced in May 2013, it is the successor to Xbox 360 and the third base console in the Xbox series of video game consoles. It was first released in North America, parts of ...
/ PlayStation 4, are often initially sold as loss leaders. This helps assert market share for the console, which enables the creation of a development ecosystem for games. The profit is then made on the sale of games and accessories over the system's lifetime.


See also

*
Bait-and-switch Bait-and-switch is a form of fraud used in retail sales but also employed in other contexts. First, customers are "baited" by merchants' advertising products or services at a low price, but when customers visit the store, they discover that the a ...
* Competition law *
Dumping (pricing policy) Dumping, in economics, is a kind of injuring pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price below the normal price with an injuring effect. The objective of d ...
*
Freebie marketing The razor and blades business model is a business model in which one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as consumable supplies. It is different from loss leader marketing ...
*
Parallel importing A parallel import is a non-counterfeit product imported from another country without the permission of the intellectual property owner. Parallel imports are often referred to as grey product and are implicated in issues of international trade, a ...
*
Predatory pricing Predatory pricing is a pricing strategy, using the method of undercutting on a larger scale, where a dominant firm in an industry will deliberately reduce the prices of a product or service to loss-making levels in the short-term. The aim is th ...
* Pricing strategies *
Product bundling In marketing, product bundling is offering several products or services for sale as one combined product or service package. It is a common feature in many imperfectly competitive product and service markets. Industries engaged in the practice ...
*
Razor and blades model The razor and blades business model is a business model in which one item is sold at a low price (or given away for free) in order to increase sales of a complementary good, such as consumable supplies. It is different from loss leader marketin ...
*
Suicide bidding Suicide bidding is a response to a tendering exercise in which a potential supplier, anxious to win business, submits a proposal to carry out the work for less than it will cost. These procurement processes are typically modelled as reverse seal ...
*
Tying (commerce) Tying (informally, product tying) is the practice of selling one product or service as a mandatory addition to the purchase of a different product or service. In legal terms, a ''tying sale'' makes the sale of one good (the ''tying good'') to the ...


References

{{Reflist Pricing Advertising techniques Marketing techniques Selling techniques