A loss leader is a product or service that is priced well below what is usual or customary with two key goals in mind. One, it draws customers in the hopes that they will make more expensive and profitable purchases with any money they save and once they are paying attention. And two, it familiarizes consumers with a company’s products and services, thus assuring their brand loyalty. Although the use of loss leaders has been a long-standing marketing strategy of larger retailers, it’s also found its place among smaller retail and online businesses as of late.
Here’s a quick overview of the primary reasons businesses cite when using loss leaders, as well as their associated challenges:
Primary Reason #1: Captures Customers’ Attention
Loss leaders that are suitably promoted, placed prominently and positioned head-to-head with their closest competition can be hugely successful when it comes to drawing in new customers. However, businesses need to be sure they can handle any potential increase in sales that may result, which may mean more boots on the ground, more staff on the phone and a lot more headaches. If you’re not ready to handle the business a loss leader strategy can create, you can do your company’s image and its bottom line a lot more harm than good.
Primary Reason #2: Establishes Brand Loyalty
Using a loss leader strategy to establish loyalty to your products or services either in your current marketplace or in a new one is not a bad idea. However, if you’re not careful, it can actually backfire and devalue your brand. Bear in mind that once you set low expectations, it may be impossible to recover. That’s why it’s so important that you make it clear the price you are offering is only temporary, what the regular price will be and when it will kick in. If what you’re selling is provided by a third-party manufacturer or supplier, you’d do well to alert them before you cut prices on their products. They may not look kindly on your toying with their perceived value in the marketplace and may stop selling to or working with you as a result.
Primary Reason #3: Beating the Competition
Using a loss leader can make any business stand out from the competition. After all, if customers can buy something from you that is the same as what is being offered next door and save money, they will. However, keep in mind that shoppers who respond to loss leaders are oftentimes bargain hunters in general and tend to be fickle. Although some of the customers who buy from you will certainly come back for more, many of them won’t. They’ll just move on to the next deal. So you need to think carefully about what you’re risking by using a loss leader and weigh it against a realistic assessment of the potential payoff as well as losses.
Primary Reason #4: Inventory Control
Inventory that is at the end of its lifecycle, products that have not sold very well and surplus inventory all share one thing in common. They make great fodder for implementing a loss-leader marketing strategy. If you’ve got inventory at the end of its lifecycle, make sure that’s clearly stated on the product or in your promotional materials to avoid any problems. Avoid stockpiling by limiting the number of products or times customers can tap your service at the discounted price. Make sure you have a fair amount of stock at the discounted price as it is specifically advertised when you start your loss-leader campaign. If you don’t that’s considered fraud and could get you into a whole lot of trouble.
All things considered, loss leaders can be an effective means of growing your existing business. However, you need to take the necessary time to plan carefully and gauge whether or not your business can manage the short-term financial setback that so often accompanies the use of this approach, as well as the odds that it will result in your long-term gain. If you don’t, what was once a loss leader can all too readily become, quite simply, a loss.