Loss Leader Pricing Strategy: Advantages, Problems, Example
When a company sells its products without any profit margins or in the loss to attract the new customer or gain more sales, it is known as Loss leader Pricing Strategy.
Many big companies are Utilizing these strategies like Amazon, D-mart, Flipkart, etc.
A Loss leader Pricing Strategy is to gain more authority from the customer, gain more customers in the market, or gain more sales in the market.
It is also used to Secure the Future revenue of the company.
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Types of Loss leader Pricing Strategy
There are basically 4 Types of Loss leader Pricing Strategy Businesses use in the market which is:
- Introductory Pricing:
In this type of loss, leadership strategy businesses introduce their price in the market as a discount and attract the customer to buy the Product. They somehow use the catchy headline “What are you waiting for? Discount is here 50%”.
This all is the part of the Loss leader pricing Strategy, furthermore, it will direct the Customer mindset and they will Buy it.
- Store Placement:
The perfect example of this type of loss leader pricing strategy is the Grocery store.
Let’s see…Some grocery stores Place milk in the store. Do you know why? Because this is the daily need thing by storing the milk in the Grocery store. You can attract many customers as well as purchase many items with the Milk.
See… that when a customer wants to buy Milk they come to your store and buy and suddenly they remember that they have to buy one packet of bread or some dozens of eggs. Then this can give you more profit.
This is the perfect example of store placement in loss leader pricing strategy.
- Inventory Management:
You may have heard that some shops Give Huge discounts on the pricing of Winter clothes in summer and Summer clothes in winter. Why do they do this?
This all is part of the loss leader strategy. Yeah… the shop owner makes a loss on the Product of season item but they will make a huge profit in the end.
Let’s see an example:
You are crossing the market and you suddenly see a board where it says “70% Discount on the summer clothes” But it is Winter now. You probably think that you can use these clothes in the upcoming so you go and purchase the products. Suddenly you thought that you have to buy one jacket for yourself because of the winter season. So you will buy the jacket at full profit. So this is how shop owners get new customers and even sell out their products.
- Free samples:
Everyone loves Free things. Also, some great business owners Using this Free technique to Make a Profit. They give discounts on things like Buy 2 get 1 free or Buy 5 get 2 Free or whatever they think is great. It makes a great impact on the customer’s mind and customers eventually buy this because of the Free offer. This is one of the Effective and most profitable Types of Loss leader pricing Strategies.
Advantages of Loss leader Pricing Strategy
There are many advantages of a Loss leader pricing strategy. Let’s dig into it…
- Stand in the market:
As you can see in the market there is a 1% monopoly. To stand in the market you have to do some additional things in terms of marketing. When you go in the market and you have a similar product as your competitors then you can use the Loss leader pricing Strategy and this can give you Customers. Here Loss leader pricing Strategy can be an effective and Knowledgeable move to stand out in the market.
- Increasing sales:
No doubt, the main purpose of the loss leader pricing strategy is to increase sales in other products or in the same product. As the number of Customers’ feet increase in the shop the number of sales increase in the shop.
- Brand Loyalty:
When customers purchase some product from you at a very low price as compared to the Market value of the product, it will gain Brand loyalty in the eye of the customer. If you build your brand Loyalty then you can build your customer base easily.
Problems with the Loss leader Pricing Strategy
- Cherry Pricking:
When you focus on Loss leader pricing strategy then there are some customers who only offer a product but do not buy the other product this is known as Cherry picking. This is one of the biggest disadvantages or problems of Loss leader Pricing Strategy.
Due to the Cherry Picking Businesses or markets have to suffer from the Big loss. If the customers continuously pick the Cherry-pick then the Owner should stop the loss leader pricing strategy.
This problem basically occurs with the regular customer or Buyer. Let’s say you don’t decrease the price of the product as the Buyer or customer wants, then the customer can go to any other place to buy the product. This can decrease your brand value or Customer/Buyer too.
- Stocking Problem:
Sometimes to start the Loss leader pricing strategy the owner doesn’t have enough stock to implement the strategy. This can decrease the revenue of the Business. Wherever if there are any other competitors of your product in the market, they can Steal your Customer or Buyer.
- Brand Perception:
What if customers don’t need any discount on the product. Yeah… Sometimes giving discounts can become a Nightmare to the marketer. It can easily decrease your Brand Perception. You can see the huge impact of this on Luxury brands.
- Legal Issue:
You should know that the Loss leader pricing strategy is banned in some countries like the USA, Colorado, and including California. It is also partially banned in some Countries Like
When to Use a Loss Leader Pricing Strategy?
When you want to increase the volume of the sales, when you want to increase the Brand authority you should use the Loss leader pricing Strategy. Here are some Tips:
- Clear Old/previous Stock:
When you want to clear the old stock you should use the Loss leader pricing Strategy. This will give you enough space in your inventory to store the New product as the market demands. Once a customer comes to your shop to buy the product you can pitch the buyer to buy the product.
- Drive Loyalty:
When customers see the low-cost product in the shop they will come automatically, and this can build Strong Drive loyalty. Furthermore, it can also increase brand awareness or perception.
- To Remain Competitive in the market:
As we discussed above, to stand in the market, a loss leader pricing strategy is one of the best ways. You can attract the customer by giving the low price product and remain competitive in the market.
Examples of Loss leader Pricing strategy
There are many companies that are working on the Loss Leader Pricing Strategy Like:
Toyota and many more.
- A Loss leader Pricing Strategy isto gain more authority from the customer, gain more customers in the market, or gain more sales in the market.
- It is best to grow the market value and Volume of Sales
- Somehow it can Hurt small businesses and manufacturers.
- It is also known as the Controversial Strategy.