Loss Leader

Definition

A loss leader is a product or service that a retailer sells at a price below its market cost to attract customers and stimulate other sales. The goal is to generate additional revenue from the sale of other, more profitable items in the store.

5 Must Know Facts For Your Next Test

1. Loss leaders are commonly used in the retail industry to entice customers into a store, where they may then purchase additional, more profitable items.
2. The goal of a loss leader is to increase overall sales and market share, even if the loss leader itself is sold at a financial loss.
3. Retailers often use loss leaders on high-demand, frequently purchased items, such as groceries or consumer electronics, to drive foot traffic to their stores.
4. While loss leaders can be effective in attracting customers, they can also reduce a retailer's overall profitability if not used strategically.
5. The success of a loss leader strategy depends on the retailer's ability to convert the initial sale into additional, more profitable purchases by the customer.

Review Questions

• Explain how a loss leader pricing strategy can be used to support a retailer's overall marketing mix.
  • A loss leader pricing strategy can be an effective tool within a retailer's marketing mix. By offering a product or service at a price below cost, retailers can attract customers to their stores, where they may then purchase additional, more profitable items. This can help drive overall sales, increase market share, and build brand awareness, even if the loss leader itself is sold at a financial loss. The success of this strategy depends on the retailer's ability to convert the initial sale into additional, more profitable purchases by the customer.
• Describe how a loss leader pricing strategy can impact a retailer's profitability and distribution channel relationships.
  • While a loss leader pricing strategy can be effective in attracting customers and driving overall sales, it can also have negative impacts on a retailer's profitability and distribution channel relationships. By selling a product or service at a price below cost, the retailer's profit margin on that item is reduced, which can lower their overall profitability. Additionally, this strategy may strain relationships with suppliers and distributors, who may be unwilling to provide products at a price that results in a financial loss for the retailer. Retailers must carefully balance the potential benefits of a loss leader strategy with the potential risks to their profitability and distribution channel partnerships.
• Evaluate the potential long-term consequences of a retailer's overreliance on a loss leader pricing strategy.
  • Overreliance on a loss leader pricing strategy can have significant long-term consequences for a retailer. While the strategy may be effective in the short-term in attracting customers and driving sales, it can ultimately erode the retailer's profitability and financial sustainability. Consistently selling products at a loss can lead to reduced profit margins, which can make it difficult for the retailer to invest in other areas of their business, such as marketing, customer service, or inventory management. Additionally, an overreliance on loss leaders may damage the retailer's relationships with suppliers and distributors, who may be unwilling to continue providing products at prices that result in financial losses. In the long run, a retailer's overuse of loss leader pricing can undermine their overall competitiveness and viability in the market.

Related terms

Pricing Strategy: The approach a business takes to set the prices of its products or services, which can include loss leader pricing.

Promotional Pricing: The temporary reduction of prices to drive traffic, increase sales, and build brand awareness, often through the use of loss leaders.

Profit Margin: The difference between the selling price and the cost of a product or service, which is reduced when using a loss leader strategy.