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Loss-leader pricing is an aggressive pricing strategy aimed to lure customers away from competitors into one’s own store. Once the customer steps in the store, the expectation is to negate the loss with the sale of profitable products. But it carries risks. We’ve gathered the pearls and pitfalls of it, so let’s dive in.
What is loss-leader pricing
Loss-leader pricing refers to the strategy where or more products are sold below cost to lure buyers into the store. Once they stepped foot into the store, they’ll buy actually profitable products. At least that’s the assumption.
But today’s shoppers are price sensitive and tech-savvy. We all know where to find the best prices, or at least know where to search for it.
Comparison shopping engines yield the cheapest store within seconds. So even if you lure shoppers into your store, that doesn’t mean they’ll remain loyal to you. They can easily find the best price if it’s elsewhere.
In seasonal shopping events such as Black Friday and Cyber Monday, many retailers pursue loss-leader pricing.
Whereas some stores always loss-lead and profit from upsells, refills and accessories. For example, they sell printers for a loss but profit from the sale of ink and toner.
An electric toothbrush is a great example of a loss-leader. This one costs £99.
Electronic toothbrushes are often sold below cost.
But these sellers easily recoup their loss with the toothbrush heads which need to be changed much more regularly than the brush itself.
- It builds hype around your brand and increases awareness.
- Bargain hunters will buy the loss leaders but won’t throw additional products into their carts.
- It’s illegal in many countries.
- SMBs may not afford to take big losses, and there is no guarantee that you’ll cover your costs.
- You can’t easily switch to normal prices, you’ll face a backlash. When customers’ perception is altered once, they might expect below-average prices for good.
Loss-leader pricing might be profitable in some cases, there are risks that come with this strategy. Therefore, when you’re implementing this strategy, keep in mind that you must:
- Beware of the bargain hunters that won’t purchase additional products that you expect to profit from
- Be careful about the laws that regulate or even prohibit loss-leading in some countries
- Make sure to cover your costs with a risk assessment you’ll conduct prior to implementing this strategy
- Try not to be labeled as the destination of discounted shopping, unless you aim to
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