Loss leaders? Good or bad?

If you’re a retailer, you’ll be very aware that sometimes consumers need a little bit of extra encouragement to come through your door. Using loss leaders is a well-established way to do this -as long as you get your strategy right.

A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store. Loss leaders make up for the losses they incur by enticing consumers to make further purchases of profitable goods while they are in the shop. If you undercut your competitors on their pricing, customers will most likely come to you rather than turn to them – which means using loss leaders can help drive customer loyalty.

While loss leaders are a useful way to tempt customers into spending money on your goods, they are not without their controversy. In some American states, the strategy is seen as unscrupulous because it allows large retailers to use their spending power to crush smaller competitors. Using a loss leader can also be detrimental to relationships with suppliers, who may take a dim view of your strategy if it is having an effect on the number of orders they receive from other clients.

How to use loss leaders

Make sure your business will be able to absorb the financial impact of using loss leaders. Thorough market research, find out why customers come to your business and which products are popular enough to entice consumers through your doors.

When you’re deciding on a product to use as a loss leader, remember customer demand is likely to rise – so make sure you have enough of your chosen product in stock. Seeing as you want them to attract attention, place your loss leaders somewhere obvious, but ensure consumers see as many of your other products as possible before they reach the loss leader. The back of the shop or surrounded by images of other products is the best option.

Ensure that you change your loss leader or it’s merchandising every so often so consumers don’t get too used to your pricing strategy. It’s no use marking down a price if your consumers don’t know about it – so if you are introducing a loss leader, remember to draw attention to it. Use posters, press, the internet and signage around the shop to let consumers know – you may even want to draw a comparison with competitors.

Using a loss leader can be detrimental to relationships with suppliers so make sure your business will be able to absorb the financial rewards before embarking on this risky pricing structure.

It is also vital to ensure you have enough of your chosen product in stock and that they products you are selling at a loss are clearly visible and placed somewhere obvious. It is also highly advisable that you change your loss leader or its merchandising every so often so that customers will remain as drawn to your store the tenth time they hear about an offer as they were the first time.

Remembering to draw attention to your loss leaders is essential. It is pivotal that they are promoted tirelessly so that the customer will go out of their way to visit your store or website.

Examples of when loss leader strategies were used are as follows:

  • When it came out in September 2009, Asda sold much-hyped Dan Brown novel The Lost Symbol for £5 – way below its £18.99 recommended retail price (RRP). There were speculations the supermarket was losing £4 a book.
  • Inkjet printers are often sold to consumers way below cost price. The difference is made up in the sale of the ink cartridges.
  • The iPhone (RRP £199) was given away for free to O2 customers who made up the losses by paying £45 a month for a phone contract.

It can be concluded that opting to become a loss leader is an exceptionally risky strategy. It may result in broken relationships with suppliers but worst of all it may end with a loss rather than a profit. All outcomes must be evaluated before a business embarks on a price leadership structure. If they feel that they can be as strong as ever even if the worst possible outcome occurs, then it definitely something worth looking at.
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