Loss leaders are products or services that are sold at a loss or significantly below their cost to attract customers and encourage them to make additional purchases of other, more profitable items. By using loss leaders, firms aim to entice consumers into their stores or websites, hoping that the increased foot traffic or online visits will lead to more significant overall sales and increased customer loyalty. Here are some examples of consumer goods and services that firms use as loss leaders:
Grocery Items: Grocery stores often offer certain staple food items like milk, eggs, or bread at prices below cost. The idea is to get customers through the door with these everyday necessities, with the expectation that they will buy other higher-margin items during their shopping trip.
Electronics: Retailers may use popular electronics like smartphones, tablets, or gaming consoles as loss leaders during special sales events. They hope that customers buying these items will also purchase accessories, extended warranties, or other related products that offer better profit margins.
Printers and Ink Cartridges: Printer manufacturers sometimes sell printers at low prices to get them into consumers' homes or offices. However, they make profits on ink cartridge replacements, which can be expensive compared to the cost of the printer itself.
Streaming Devices: Companies that produce streaming devices (e.g., streaming sticks) may offer them at a discount or even at a loss. They make money by selling subscriptions to streaming services, content rentals, or digital purchases made through their devices.
Gym Memberships: Fitness centers and gyms may offer discounted membership rates or even free trial periods to attract new customers. They rely on the expectation that many members won't fully utilize their membership, while others may sign up for additional services, personal training sessions, or merchandise.
Cell Phone Plans: Telecommunication companies might offer attractive promotional cell phone plans, sometimes with subsidized devices, to acquire new customers. They recoup their losses through the recurring monthly fees and additional services like data overages and international call charges.
Video Game Consoles: Video game console manufacturers may initially sell their consoles at a loss, banking on profits from game sales, online subscriptions, and accessory purchases over the console's lifecycle.
Software: Some software companies provide free versions of their software with limited features to entice users to upgrade to premium, paid versions with more functionality.
Why firms use these products as loss leaders:
Customer Attraction: Loss leaders draw customers to a store or website and create excitement around promotional events, ultimately increasing overall foot traffic and sales.
Upselling and Cross-selling: By getting customers in the door with a loss leader, firms have a chance to upsell or cross-sell other products with higher profit margins.
Competitive Advantage: Offering attractive loss leaders can help companies stand out in a competitive market, enticing consumers to choose their brand over competitors.
Customer Acquisition and Loyalty: Loss leaders can be an effective way to attract new customers who may become loyal to the brand and make repeat purchases in the future.
Clearance of Excess Inventory: Sometimes, loss leaders are used to clear out excess inventory or to make way for new products.
It's important to note that while loss leaders can be beneficial for businesses, careful planning and analysis are essential to ensure that the strategy leads to increased overall profitability rather than losses. Additionally, some regulations and ethical considerations surround the use of loss leaders, as they can impact competition in the market.