Q&A - Should a business use a “loss leader” as part of its pricing tactics?

The use of loss leaders is a method of sales promotion. A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store. The purpose of making a product a loss leader is to encourage customers to make further purchases of profitable goods while they are in the shop. But does this strategy work?

Pricing is a key competitive weapon and a very flexible part of the marketing mix.

If a business undercuts its competitors on price, new customers may be attracted and existing customers may become more loyal. So, using a loss leader can help drive customer loyalty.

While loss leaders are a useful way to attract customers, they are not without their controversy. For example, in the USA, the strategy is seen as unscrupulous because it allows large retailers to use their superior buying power to undercut smaller competitors. Using a loss leader can also be detrimental to relationships with suppliers, who may object to the strategy if means lower orders from other clients.

Another risk of using a loss leader is that customers may take the opportunity to “bulk-buy”. If the price discount is sufficiently deep, then it makes sense for customers to buy as much as they can (assuming the product is not perishable).

How should a business use a loss leader?

Firstly the business needs to ensure that it can afford the cost of using loss leaders. For most retailers this shouldn’t be too much of a problem, particularly if the products chosen are limited in number.

Secondly, the business should research the reasons why customers come to the business and which products might be popular enough to entice consumers through the doors at a loss-leading price.

If the loss-leading product has a strong price elasticity of demand, then customer demand is likely to rise significantly - so the business needs to ensure it has enough of the chosen product in stock. If there is a danger of stockpiling, then the business may set limits on the quantities that can be bought.

Because the retailer want them to attract attention, it should place the loss leaders somewhere obvious, but ensure consumers see as many of other products as possible before they reach the loss leader. The back of the shop or surrounded by images of other products on a website is the best option.

Using a loss leader is essentially a short-term pricing tactic for any one product. Customers will soon get used to the tactic, so it makes sense to change the loss leader or its merchandising every so often.

Finally, It’s no use marking down a price if customers don’t know about it. So the pricing tactic needs to be supported by suitable promotion drawing attention to it. Retailers typically use posters, press, the internet and signage around the shop to let consumers know - many also like to draw a comparison with competitors the reinforce the pricing difference.