Selling your product or service at a lower profit margin, or even at a loss may seem like a recipe for failure, however, there is some strategy to this. Loss Leader Selling uses this practice to attract customers to your business and its other offerings. This article will explain what Loss Leader Selling is and how it works, while also providing examples.
What is Loss Leader Selling?
Loss Leader selling is a competitive pricing strategy. The Product is sold at a discounted price below its market cost. Loss leaders are offered at a price below their minimum profit margin, not necessarily below cost and at a loss. The item sold at a reduced priced is the “loss leader”. The loss leader leads customers to continued sales of other services or items. It also serves to create a new customer base in the hopes of securing future recurring revenue.
Start your ABN application in minutes!
Need an Australian Business Number to start a casual job? We've got you covered.
How does it Work?
The are many characteristics and variations of loss leader selling, but all, serve to attract new and existing customers to the business’s products or services. Retail stores place loss leader products at an inconvenient part of the store. This means customers will walk past goods priced with higher profit margins. Loss leader products should also be provided at a limit, or perishable in nature. An example is setting a maximum product number per purchase. This discourages customers from stockpiling the product and cherry picking. Cherry Pickers are customers who purchase only the loss leader products without buying anything else.
Loss leader can also come in the form of high-end costly products, rather than bargains. This is done to enhance the image of the business, by making it look more prestigious. These prestigious items are often advertised at the forefront of the business, attracting ‘lookers’ and ‘window shoppers’. This technique is often used in the car industry. Car manufacturers will produce high end sports and luxury cars to improve their brand image. Manufacturers then place the cars on display in dealerships to attract customers. These customers may not be able to purchase the car, but impressed by the manufactures work, will purchase less expensive and more profitable products.
Example of Loss Leader Selling
An Example of a company that uses this strategy is Microsoft’s Xbox video game console. Microsoft sells the console at a low profit margin per unit. They knew that there was potential to profit from the sale of the console’s associated exclusive video games with higher margins. Additionally, the product requires a monthly subscription to utilize other features of it and the games. The most important part here, was not selling and achieving a profit on the console, but getting in the hands of as many customers as possible. The profit would by the console accessories, games and subscriptions.
Loss Leader Selling and Suppliers
Suppliers can recommend that resellers and retailers of their products charge an appropriate price for particular goods and services. It is illegal for suppliers to cut off supply to resellers in an effort to pressure a minimum price or any other set price on their products or services. Suppliers can withhold supplies to a company that engages in loss leader selling. This does not apply to genuine clearances, such as a closing down sales. This exception also applies to suppliers that agree to have their products used for loss leader selling.
Conclusion
Loss leader selling can be an effective way to incentivise your customers, by offering one item at a low price in the hopes that the customer will also purchase the more expensive item. However, you have to make sure you do so ethically and not without the knowledge of your supplier. If you want further information about pricing your products legally, it may be worth contacting a business lawyer for advice.
Don't know where to start?
Contact us on 1800 529 728 to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 600+ expert lawyers or to get answers to your legal questions.
