What are we talking about? When you commit to a loss leader pricing strategy, you create an expectation with shoppers that your brand is the “cheapest brand.” This perception can be hard to shake, even if you really want to switch up your pricing strategies in the future.Ĭonsumers tend to have good memories when it comes to prices, so it’ll be a jarring move to go from a really good deal to a pretty common price-or worse, to the expensive option. You might argue that this one could be a pro or a con, but for many businesses, the lack of flexibility can become problematic. This is big in grocery, where many stores put the daily staples like dairy in the back, past some more tempting categories. That’s when you price the profitable products in their footpaths, as most consumers will add to their baskets on the way to the loss leader. The benefit for you is that they have to walk by all the other items to get there. Shoppers will be hunting for that deal and will become familiar with that section of your store. The concept here is that items priced in the way back of the store are the loss leaders. In a boost for retailers, loss leader pricing can actually help you design the layout of your store (or store layout can help you decide which items to price at a loss). In either case, loss leaders can build their own advantage by pricing lower than their competitors might be willing to go. So, you price it low to build up trust here before switching pricing strategies once you’re more established. You have a tried and trusted product in your home market, but it’s an unknown quantity in a different country. Or, you want to expand your business in a new region. So, you price a brand-new product at a loss so more people are willing to take a chance on an unknown item. For example, you might want to generate some interest quickly and get a few quick wins. Low prices are a big incentive for shoppers to buy, which makes loss leader pricing a possible strategy if you’re looking to launch a new product or enter a new market. 2: Launch a Product or Penetrate a Market Same with razors, as you can keep the handle and swap out the blades. Toothbrushes can be priced at a loss, while replacement toothbrush heads are marked up slightly. A few good examples are electric toothbrushes and manual razors. What many do if they’re asking their resellers to price an item as a loss leader is to focus on captive products to turn a profit. This is great for retailers, as they’re getting a cut of all those sales. The idea is that the product sold at a very attractive price will tempt shoppers into spending more. This is a basic component of turning loss leader items into a profitable strategy. The first positive for loss leaders is in consumer buying behavior-shoppers who feel like they’re getting a deal on one product are more likely to buy other items. Unsurprisingly, there are a number of pros and cons to selling products at a loss. Highlight new products, enter new markets, build a captive product portfolio, or serve up temporary deals. Loss leading is very much a balancing act. In reality, the reasons behind this pricing strategy are more complicated than they may seem on the surface. You’re creating, distributing, or selling this product-why should you sell it at a loss? This is contrary to many tenets of pricing, which often include setting the best price to balance profit margins, sales, and manufacturing costs. Loss leader pricing is when one or more products are sold below cost, meaning the sticker price is actually lower than the manufacturing and distribution costs. So how can you tell loss leader pricing is right for you? Let’s figure that out. Done wrong, and it could land your business in hot water with customers or even the law. Done right, and it can be a profitable business strategy. This is the world of loss leader pricing. Shoppers are always on the hunt for that “too good to be true” price, but what about from the other side? Should brand manufacturers and retailers be just as eager to set a too-good-to-be-true price as shoppers are to find one?
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