A loss leader is a strategy that involves us selling a product at a price that is not very profitable, but is sold to attract new customers or sell other products.
Advantages include breaking into a new market as it attracts customers to try out from your business. This leads to people buying additional items or forgo the purchase of a loss leader entirely to purchase another item that is priced at a profit. Increasing foot traffic by enticing them with cheap products can create more visibility for products that are regularly priced, thus increasing sales.
However, buyers also might visit several online or physical stores purchasing loss leaders at each but never buying another item. If a business doesn’t plan loss leader pricing well, customers might begin to predict when they’ll drop prices and wait for that time to arrive before making a purchase.
Pricing items at or below cost is an effective way to attract customers, increase sales, and even manage inventory just like how IKEA does their marketing. However, this practice should be used with caution as some businesses might realize great profit loss after, negative brand perception throughout, and legal issues if they use it. Before you take your red marker and slash prices, talk with your marketing, merchandising, and legal team to carefully consider if this strategy is right for your business.
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