Loss leader

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A loss leader, or simply a leader,[1] is a product sold at a low price, at or below its market cost[2] to stimulate other sales of more profitable goods or services. Using a loss leader, often a very popular good or service, is a type of sales promotion—a marketing strategy that focuses on pricing strategy. Sometimes "leader" is used as a related term and can mean any popular article, i.e., one sold at a normal price.[3]

Look up loss leader in Wiktionary, the free dictionary.

Contents

Strategy [edit]

One use of a loss leader is to draw customers into a store where they are likely to buy other goods. The vendor expects that the typical customer will purchase other items at the same time as the loss leader and that the profit made on these items will be such that an overall profit is generated for the vendor.

"Loss lead" describes the concept that an item is offered for sale at a reduced price and is intended to "lead" to the subsequent sale of other items, the sales of which will be made in greater numbers, or greater profits, or both. It is offered at a price below its minimum profit margin—not necessarily below cost. The firm tries to maintain a current analysis of its accounts for both the loss lead and the associated items, so it can monitor how well the scheme is doing, as quickly as possible, thereby never suffering an overall net loss.

Marketing academics have shown that retailers should think of both the direct and indirect effect of substantial price promotions when evaluating their impact on profit.[4] To make a very precise analysis one should also include effects over time. Deep price promotions may cause people to bulk-buy (stockpile), which may invalidate the long-term effect of the strategy. This is the association rule analysis.[5]

When automobile dealerships use this practice, they offer at least one vehicle below cost and must disclose all of the features of the vehicle (including the VIN). If the loss-leader vehicle has been sold, the salesperson tries to sell a more upscale trim of that vehicle at a slightly discounted price, as a customer who has missed the loss-leading vehicle is unlikely to find a better deal elsewhere.

Loss leaders can be an important part of companies' marketing and sales strategies, especially during dumping campaigns.

Characteristics of loss leaders [edit]

  • A loss leader may be placed in an inconvenient part of the store, so that purchasers must walk past other goods which have higher profit margins.
  • A loss leader is usually a product that customers purchase frequently—thus they are aware that its unusually low price is a bargain.
  • Loss leaders are often scarce, to discourage stockpiling. The seller must use this technique regularly if he expects his customers to come back.
  • The retailer will often limit how much a customer can purchase.
  • Some loss leader items are perishable and cannot be stockpiled.

Some examples of typical loss leaders include milk, eggs, rice, and other inexpensive items that grocers would not want to sell without other purchases.

Examples [edit]

Gillette razors [edit]

The razor and blades business model, pioneered by American businessman King C. Gillette, is similar to the loss-leader business model. Razor handles are given away for free or sold at a loss, but sales of disposable razor blades are very profitable.

In 1910, the City of Pasadena criticized the private Edison Gas and Electric Company for giving away free electric lamps to solicit new electricity subscribers.[6]

Videocassettes [edit]

In 1979, American businessman Earl Muntz decided to sell blank tapes and VCRs as loss leaders to attract customers to his showroom, where he would then try to sell them highly profitable widescreen projection TV systems of his own design. His success continued through the early 1980s.[7]

Automobiles [edit]

Chevrolet's Corvette was originally intended in the 1950s to be an "image builder" and loss leader for General Motors, the idea being that men would go to showrooms to look at this "automotive Playboy Bunny"—which they knew they could not afford—and end up purchasing a lower-cost model. It has, however, enjoyed significant sales successes in the 1960s and produced a substantial annual profit.[8][9]

Perishable food [edit]

Supermarkets sell food staples such as sugar or milk at less than the cost at which they were purchased in order to draw customers to their business. History demonstrates that although this may be a profitable business strategy for supermarkets, the suppliers—dairy farmers in the case of milk—bear the brunt of the low retail price, because it makes the wholesale market so competitive, driving prices below production costs. In the case of milk, dairy farmers also claim that the price war is devaluing milk in the minds of consumers.[10]

See also [edit]

References [edit]

  1. ^ Leader, The American Heritage Dictionary of the English Language: Fourth Edition, Houghton Mifflin Company, 2000.
  2. ^ Loss Leader, The American Heritage Dictionary of the English Language: Fourth Edition, Houghton Mifflin Company, 2000.
  3. ^ Leader, Random House Unabridged Dictionary, Random House, Inc., 1997.
  4. ^ Van den Poel Dirk, Jan De Schamphelaere, Geert Wets (2004), "Direct and Indirect Effects of Retail Promotions," Expert Systems with Applications, 27 (1): 53–62.
  5. ^ Vindevogel B., Dirk Van den Poel, and Geert Wets (2005), "Why promotion strategies based on market basket analysis do not work?". Expert Systems with Applications, 28 (3): 583–590.
  6. ^ "Cuts Pasadena's Lights To 4 Cents: Charges 9 Here". Los Angeles Herald. 1910-06-14. 
  7. ^ Robert C. Post (October 2005). "Henry Kaiser, Troy Ruttman, and Madman Muntz: three originals". Technology and Culture (Johns Hopkins University Press) 46 (4). ISSN 0040-165X. 
  8. ^ Easterbrook, Gregg (12 January 2011). "Cars on the Catwalk". Reuters Blogs. Retrieved 8 August 2012. 
  9. ^ "1970 Chevrolet Corvette Coupe". Car and Driver. September 1969. Retrieved 8 August 2012. 
  10. ^ Poulter, Sean (14 January 2011). "Farmers fuming as supermarkets sell milk at half price of water". Daily Mail. Retrieved 8 August 2012. 
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