Those who understand the mechanics behind the loss leader will tell you that there are very few marketing strategies that are as bold or ingenious.
The loss leader is basically an item that is intentionally priced at a loss to attract customers in the hope of stimulating other profitable sales.
One of the most well known loss leaders would have to be Coca-Cola, used in supermarkets and convenient stores worldwide to great effect. According to trafficology.com, consumers do not just purchase soda, they also purchase chips, dip and other snack items – retailers use the beverage to cunningly lure them away from other shops, a shrewd yet highly successful tried and tested technique.
The popular Ikea hotdog is another example of a successful loss leader. Business Insider shares that the identity one associates with their inexpensive food flows throughout the store when one makes other decisions. One knows how much food costs elsewhere but often has no idea of the value of a couch. Their loss incurred on food sold is more than made up by their mark-ups on other items.
It is important to be mindful when creating any loss leader strategy to minimise risk. Below are a few useful tips to follow:
- Preferably use items that fall into the overstocked category. It will allow the clearing of unsold goods as well as minimise losses on products since they were not selling anyway.
- Always follow compliance laws by avoiding unfair pricing strategies.
- Preferably sell items that require ‘add-ons’ to function. An example of this is when giving away razor units for practically nothing will still possibly generate profits, as customers will return to buy the razor blades.
- Position your products well, especially within a retail environment. Customers should always be able to fund other higher priced items nearby. This also works in an e-commerce environment – always categorise your placement of products.
- Be careful not to dilute your brand. If you sell generic non-branded items (or your own brand), make sure that the image is not affected by such a strategy as they may be seen as being low in value.
When executed correctly, the loss leader strategy can effectively draw attention to newly introduced items to build a customer base, generate new interest in older products, sell other items available in the same store as well as assist e-commerce platforms create traction for newly introduced items. It is one of the marketing tools in one’s arsenal that can be drawn upon from time-to-time to help boost sales if implemented correctly.