Loss leader
A loss leader, or simply a leader,[1] is a product sold at a low price (at cost or below cost)[2] to stimulate other profitable sales. It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. A loss leader is often a popular article. Sometimes leader is now used as a related term and means any popular article, in other words one sold at a normal price.[3]
Sales of other items in the same visit
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.
An example is a supermarket selling sugar or milk at less than cost to draw customers to that particular supermarket.
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. In actual practice, especially with luxury cars, the models that dealers stock on their lots contain many "options" such as leather upholstery and a moonroof, as the base vehicle without these amenities (known as a "stripper") is usually available only by special order from the factory (frequently for fleet use such as for taxicabs). Companies and dealerships follow this practice since considering these features as options is more lucrative than raising the price of the model and including these as "standard" equipment. This practice can be seen as a form of deceptive advertising, and is illegal in some jurisdictions, and falls under the strategy of bait and switch deception tactics.
Characteristics of loss leaders
- 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 of its usual price and that a lower 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 buy.
- Some loss leader items are perishable, and thus can't be stockpiled
Some examples of typical loss leaders include milk, eggs, rice, and other inexpensive items that grocers wouldn't want to sell without other purchases.
Examples
The razor and blades business model, pioneered by American businessman King 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. Since the late 1990s, this model has proven very popular and successful for inkjet printer manufacturers, where profit is derived from the sale of expensive ink cartridges.
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]
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]
Inkjet and laser printers are also often sold to retail customers below their margin price and could also be viewed as loss leaders. Some of the printers, especially the entry-level models, are sold at a loss-leading price which seems apparently affordable to most consumers, but they pay the regular price for ink cartridges or toner, and specialty papers supplied by the manufacturer. The manufacturer also limits the customers' options by not supporting third party ink, including refills. This analysis more closely parallels the strategies of tying and bundling products, however.
Loss leaders can be an important part of companies' marketing and sales strategies, especially during dumping campaigns.
Video game consoles have often been sold at a loss while software and accessory sales are highly profitable to the console manufacturer, a tactic first utilized in the sixth generation era. Sony and Microsoft, with their PlayStation 2 and Xbox, had prohibitively high manufacturing costs so they were forced to sell their consoles at a loss, and these losses widened especially in 2002–2003 when both sides tried to grab market share with price cuts. Nintendo had a different strategy with its GameCube, which while technically inferior was also considerably less expensive to produce than its rivals, so it retailed at break-even or higher prices. In the current generation of consoles; both Sony and Microsoft have sold their consoles, the Playstation 3 and Xbox 360, respectively, at a loss and made up for it through game software and accessory profits. For this reason, console manufacturers aggressively protect their profit margin against piracy by pursuing legal action against carriers of modchips and jailbreaks.
References
- ^ Leader, The American Heritage Dictionary of the English Language: Fourth Edition, Houghton Mifflin Company, 2000.
- ^ Loss Leader, The American Heritage Dictionary of the English Language: Fourth Edition, Houghton Mifflin Company, 2000.
- ^ Leader, Random House Unabridged Dictionary, Random House, Inc., 1997.
- ^ 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.
- ^ 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.
- ^ "Cuts Pasadena's Lights To 4 Cents: Charges 9 Here". Los Angeles Herald. 1910-06-14.
- ^ Robert C. Post (2005). "Henry Kaiser, Troy Ruttman, and Madman Muntz: three originals". Technology and Culture. 46 (4). Johns Hopkins University Press. ISSN 0040-165X.
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