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What is a Loss Leader?

Updated on November 23, 2014
heidithorne profile image

Heidi Thorne is an author and business speaker with over 25 years of experience in sales, marketing, advertising and public relations.

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Bummer!

I print a Word text document and the printer spits out a completely blank page. Empty ink cartridges? Nope. Off to the manufacturer's support website. After about four "If this does not resolve your issue, click here..." steps, I'm told that the printer needs a new printer head that is as much or more than purchasing a brand new printer. Having to replace my printer is not how I wanted to start out the New Year.

But it got me thinking about how the printer manufacturer is marketing itself. They're using a loss leader marketing and pricing strategy. The printer is super cheap, but the supplies (ink cartridges) and replacement parts are expensive.

Actually, this is just one flavor of a loss leader strategy.

Types of Loss Leaders

All loss leader strategies seek to offer something of value very cheaply or free, in the hopes that customers will buy other products and services. Here are some ways that this strategy is used:

  • Build Aftermarket Purchases. In the case of the computer printer, the manufacturer is offering the printer very cheaply to build sales of aftermarket supplies such as ink cartridges and parts.
  • Sell Continuing Service. This is common in the mobile phone industry. An expensive smartphone device is offered for a very low price or even free to build sales of monthly cellular phone service.
  • Trial or Free Services to Sell Upgrades. In a very similar way to selling continuing service, some companies offer free or very low priced versions or trials of their primary service products to encourage sales of their upgraded or continuing services. Click here to learn more about the "freemium" business model.
  • Offer Popular Products Cheaply to Sell Higher Priced Products at Retail. This is a common strategy in retail, particularly grocery and drug stores. For example, a grocery store may offer commonly purchased products such as orange juice and milk at rock bottom prices to encourage sales of higher priced (and higher profit!) retail grocery items. The reasoning is that the cheap product will draw people into the store and they'll just decide to purchase the rest of their grocery needs while there, as opposed to wasting time running to another store.
  • Daily Deals. Deals and discount coupon programs have been very popular. With these programs, members of daily deal websites pay a small amount for discounted coupons at a variety of retailers and service providers. For example, a customer can purchase a $50 dining gift certificate for $25. The company absorbing the loss is the retailer or service provider offering the deal, not the daily deal site.
  • Free or Discounted Installation. Offering free installation for home products such as carpeting and windows is quite common. In this loss leader strategy, the provider is offering their installation services for free or at a discount when a customer pays for the retail priced product being installed.
  • BOGO. Buy One, Get One (often referred to as "BOGO") deals are very common in both retail and service sectors. In this scenario, a customer buys one product or service at full retail and gets a second one free OR at a discounted rate. This loss leader strategy can help clear out inventory or keep service employees busy during slow sales periods.

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Loss Leader Backlash

One of the risks of pursuing any loss leader marketing strategy is that it could increase sales while at the same time incur heavier losses. Here are some scenarios:

  • Making a Break for It. A common consumer complaint in the mobile phone arena involves lengthy service contracts. Once cellphone users start using the service with their free or deeply discounted phones, they realize how expensive the service portion really is. Then as soon as their contract is up, they make a break for another carrier. Some even try to unlock their phones early to switch carriers.
  • Never Upgrading. Some customers will continue to use the low or no cost loss leader service or product forever! They never make the leap to higher priced offerings. This can drain the resources of the company.
  • Daily Dealing, but Not Returning. Restaurants, retailers and service providers who offer daily deals can attract customers who only visit when there's a deal available. There is absolutely no brand loyalty or continuing income from these folks.
  • Just Buying the Loss Leader Offering. Especially around the holidays, customers may make a beeline for a store offering a deeply discounted sales promotion on a gift item. They buy only that item and leave. So the loss from the discounted item is not offset by other purchases.

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Cutting the Losses from Loss Leaders

With the potential to experience losses of profit margin when a loss leader marketing strategy is employed, a company needs to consider some ways to minimize the losses and manage these programs. Some options include:

  • Building the Loss Leader Marketing Costs into Overall Pricing Structure. Offering discounts or free products is a cost to the business. So when a retail pricing structure is developed, these costs must be built in.
  • Limiting Loss Leader Availability. Just because a discounted or free product is being offered doesn't mean there shouldn't be qualifiers to obtain a concession. This can be done by limiting the time or quantity of the loss leader product or service. For example, a restaurant may only make daily deals available on weekdays when their business is slow and could use a sales boost, even at discounted rates.

As with any marketing campaign, doing careful profit margin analysis is necessary to determine the program's success.

Disclaimer: The author/publisher has used best efforts in preparation of this article. No representations or warranties for its contents, either expressed or implied, are offered or allowed and all parties disclaim any implied warranties of merchantability or fitness for your particular purpose. The advice, strategies and recommendations presented herein may not be suitable for you, your situation or business. Consult with a professional adviser where and when appropriate. The author/publisher shall not be liable for any loss of profit or any other damages, including but not limited to special, incidental, consequential, or other damages. So by reading and using this information, you accept this risk.

© 2014 Heidi Thorne

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    • heidithorne profile image
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      Heidi Thorne 3 years ago from Chicago Area

      Hello Nell Rose! Glad you found it interesting. Business concepts are usually quite simple underneath it all. :) Thanks for stopping by & have a lovely day!

    • Nell Rose profile image

      Nell Rose 3 years ago from England

      Hi heidi, I was vaguely aware of what a loss leader was but your explanation was so easy to read, so I learned something new thank you.

    • heidithorne profile image
      Author

      Heidi Thorne 3 years ago from Chicago Area

      Happy New Year Sheri Faye! Hope all is going well in your world. Thanks for adding your experience to the conversation and for sharing the post! Yes, using loss leaders can be very effective if managed properly. Glad to see it worked for you. Cheers!

    • Sheri Faye profile image

      Sheri Dusseault 3 years ago from Chemainus. BC, Canada

      When I had my stores I would often have a sale at very low prices and most people would also buy regular priced goods. It is a good way to improve traffic and cash flow. Also people would come back after the sale to buy something they had seen. I found it very effective. Great hub! Pinned on my Etys board!

    • heidithorne profile image
      Author

      Heidi Thorne 3 years ago from Chicago Area

      Hello CMHypno! You're not alone! There are a lot of consumers who cherry-pick loss leader offers. I think years ago when we had more limited mobility and retail outlets, this strategy had a better chance of working since driving to another retailer was a real project. Today, those competing retailers could be across the street or a mouse click away. Thanks for joining in the conversation! Cheers!

    • heidithorne profile image
      Author

      Heidi Thorne 3 years ago from Chicago Area

      Hi AliciaC! Glad you enjoyed the hub and found it useful. Whether we're in business or consumers, it's good to understand the how and why of what we buy. Happy New Year!

    • CMHypno profile image

      CMHypno 3 years ago from Other Side of the Sun

      Thanks for all the great information Heidi. I think consumers are getting more savvy and now will go to multiple shops to get the bargains. I have shops here in the UK where I know I will get good deals on laundry detergent, another that does good deals on toiletries etc. I think we are so used to getting discounts now that it almost hurts to have to pay full retail price for things lol!

    • AliciaC profile image

      Linda Crampton 3 years ago from British Columbia, Canada

      Thank you very much for this useful hub, Heidi. I knew roughly what a loss leader was, but you've given me much more information.

    • heidithorne profile image
      Author

      Heidi Thorne 3 years ago from Chicago Area

      Hello, billybuc! Indeed, if used effectively, loss leaders can be very great marketing tools. Key phrase here is "used effectively." Have heard many stories of small businesses who have gotten burned by using them (yours truly included). They don't set them up right, forget to build the costs into their overall pricing structure and don't monitor them carefully, causing a cascade of losses. Though it seems simple theoretically, it's quite a sophisticated marketing tactic. Thanks for reading and commenting, as always. Happy Sunday!

    • billybuc profile image

      Bill Holland 3 years ago from Olympia, WA

      I used loss leaders quite often when I was in retail with my own stores. If used effectively they can greatly increase sales. Great explanation of them here my friend. Have a super Sunday!

    • heidithorne profile image
      Author

      Heidi Thorne 3 years ago from Chicago Area

      Hi FlourishAnyway! I think we all can admit to taking advantage of loss leaders when we can. ;) Some businesses get used to using (even overusing) the strategy, which can encourage this behavior. As long as they build this into their marketing budget, why not? Thanks so much for adding to the conversation! Happy Weekend!

    • heidithorne profile image
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      Heidi Thorne 3 years ago from Chicago Area

      Hi Bob Bamberg! Good example of loss leader strategy in action! Once you understand the strategy, you can see it being used in so many businesses. It works, but as you noted, external forces such as public attitudes and economic shifts can turn it into losing strategy. Thanks for reading and support! Happy Weekend!

    • Bob Bamberg profile image

      Bob Bamberg 3 years ago from Southeastern Massachusetts

      For years, feed and grain stores sold baby chicks real cheap in the springtime so flocks could be replenished and to ensure future grain sales. Sort of a redneck loss leader.

      That practice changed with the disappearance of working farms and the emergence of hobby farmers...and the public's heightened enlightenment regarding animal welfare issues.

      Then, the optics weren't right...it didn't look good to be selling baby chicks so cheap. So, we feed and grain stores were only too happy to sell baby chicks at a hefty markup. And we still got the ensuing feed and supplies business for the life of the birds. Really good hub. Voted up, useful and interesting.

    • FlourishAnyway profile image

      FlourishAnyway 3 years ago from USA

      As a customer, I always appreciate good loss leaders that I can count on. For example, certain discount stores will offer new, recent DVDs for $4 just to get you in the door. I load up! You provide some excellent examples of strategies and backlash. (I was a month-to-month cell phone subscriber on a really cheap "teaser rate" plan with a major carrier for y-e-a-r-s.) You're a marketing whiz, and I always find your hubs easy to relate to.