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When it comes to pricing, what comes to your mind? That it has to be the best one plus it has to be worth what you paid for, right? Well, that’s every business owner’s dream. And for achieving success and building your business, one of the important decisions to make is how to price the product. Additionally, it is an effective profit margin that can lead to success which ultimately leads to sustainable business. Moreover, it is not a hidden fact that pricing mistakes can cost a business and put them out of the market in the long run.
However, in some cases, it can prove to be beneficial to price the products exceptionally low as it draws the customers and helps in generating the higher profits. It is known as loss leader pricing.
In today’s blog, we will be focusing on the topic of loss leadership and how PriceIntelGuru can help you achieve the best pricing model in the market.
What is Loss Leader Pricing?
While it may seem illogical to sell products at a loss, loss leader pricing can be a powerful tool for online businesses to boost their overall revenue and a strong customer base.
Loss leader pricing is a strategy used for pricing the products lower than the cost of production for attracting the new customers or selling additional products to the customers. Companies generally use loss leader pricing while entering new markets or increasing their market share.
With the help of loss leader products, retailers believe that the customers are likely to buy other products as well which are being provided at full retail price. The profit from additional purchases compensates for the loss quite well.
Loss Leader Pricing Strategy Advantages and Disadvantages
Let's explore how this pricing strategy works and its potential benefits for online businesses.
1. Better Profitability
Apart from widening the customer base and boosting the profit levels, yet another advantage of loss leader pricing is that a business can sell the older inventory. Selling old or excessive inventory at a discounted price can reduce the inventory cost and bring more customers to the shop. It benefits both the buyer and seller equally.
2. Increased Sales Volume
Sales volumes are the basic focus for every retail business. And the primary benefit of loss leader pricing is an increase in overall sales volume. Let us explain. While the loss leader products may be sold at a loss, the boost in customer traffic and additional sales of higher-margin items can outweigh the initial loss. And this loss can be considered as a cost which will eventually help you get profits that are desired to become the leader in the market.
3. Effective Inventory Management
Clearing out the stock is the biggest challenge any online retailer faces. Now, better promotions can help but still, the pricing has to be just right to make it work. And loss leadership tool of PriceIntelGuru can help in promoting slow-moving products. This can be helpful in making space for new products.
Let's see one of the major disadvantage of loss leader pricing strategy:
Loss leader pricing can be the cherry pickers. It is a category of buyers that only buy from the loss leaders and secures the best deals. They leave without buying other products from the store. These customers can be an issue for retailers as they refrain from buying full-price items in the store. Stores incur losses when such buyers make a purchase. This type of condition can be controlled by introducing limits to the number of sale products that they can purchase at once.
Loss Leader Pricing Examples
A loss leader pricing strategy can prove to be beneficial for attracting customers as well as gaining market share using different methods in a diverse range of industries.
Here’s a look at the example of loss leader pricing:
1. Holiday Deals
Consider the amazing deals offered by retailers on Black Friday and other such occasions. Such crazy deals are offered to tempt the shoppers to buy from their store instead of a competitor.
2. Electronics Products
The electronic items are considered loss leaders as many inkjet printers are sold at a lesser price or even below the cost as the manufacturer wishes to recover the cost of ink cartridges. Even video game consoles are known as popular loss leaders. They are meant for attracting buyers to the ecosystem so that console manufacturers can sell the games and other accessories at higher prices.
3. Grocery Stores
Grocery stores treat milk as the loss leader. It is often placed in the store at the back. It attracts consumers and brings them to the store for buying milk. It is likely to increase the sale of other products. As customers walk through the aisle to the milk section, they might buy other grocery stuff.
4. New Brands
For new companies, a loss leader pricing strategy can establish themselves in the competitive market. It is known as penetration pricing. The strategy is executed over a long period and then discontinued for growing the brand’s customer base.
Purpose of Loss Leader Pricing
The purpose of loss leader pricing is to attract new customers. By reducing the price of a product below the average, brands aim to entice buyers and make them step into virtual or physical stores. Customers are highly likely to purchase products they don’t even need. Once they visit the store, they buy other products as well which they come across while walking the aisle and exploring the shelves.
The purpose of loss leader pricing is to acquire customers for buying their discounted as well as full-priced products. The strategy not only promotes the products but also helps in clearing the inventory.
Explain the Loss Leader Pricing Strategy
There are different types of loss leader pricing strategies which are as follows:
Introductory Pricing
It is a type of loss leader pricing wherein stores try to attract buyers by offering an item at the discounted price initially and then charging a regular price later on. A business gets new business by marketing a few products at a lesser price.
Store Placement
Stores place loss leader products at the end. Milk and eggs are a great example. People buy them often. While walking toward milk and egg, customers are likely to buy products at a higher price. This makes up for the loss of profit on eggs and milk.
Inventory Management
Inventory clearance is as important as the right pricing. Loss leader pricing strategy binds both goals together and helps in earning profit. By pricing older inventory low, businesses can attract more customers. It helps in clearing the old inventory and selling fresh products at a profitable margin.
Free Samples
Everyone likes free samples which makes them a great loss leader. Retailers offer free samples for creating brand awareness and affinity. As per social psychology, people are likely to return the favor by making a purchase in return for the free sample. They might feel obligated to buy your product.
How to Implement Loss Leader Pricing Strategy in Your Business
1. Excessive Inventory
If a business overestimates the demand for a product, it can reduce the cost and use it as a loss leader product. This will help in liquidating the inventory and boost sales.
2. Consumables
Consumable and replacement products such as razors can be sold at a lesser price. Later on, the disposable blades can be sold at a higher price for compensating the loss.
3. Product Page Recommendations
A business can boost its additional sales prospects of other items in the store by suggesting relevant or complementary products to the buyers at the right time.
4. Business Analytics
Loss leader pricing boosts the customer activity related to website and ad campaigns offering valuable insight into the reach as well as the effectiveness of the marketing campaigns. By marketing a loss leader product, a business can track customer actions and justify the marketing expenses.
Making Loss Was Never This Fruitful
The loss leadership model enables businesses to attract customers, increase sales volume, and build long-term brand loyalty. Embrace the potential of loss leader pricing and unlock new possibilities for success.
Contact us now to transform your pricing model.