Most people have heard of a ‘loss leader’, even if they aren’t completely sure what that might actually be. In its simplest form, a loss leader is a product (or more than one product) that is sold at less than it was bought for. It sounds like a strange way to do business, but that’s because you might be focusing on the ‘loss’ element. Don’t forget there is the ‘leader’ part to think about too, and that’s the important bit – that’s the bit that makes it all worthwhile (or hopefully so, anyway).
Although technically business that sell products for less than they bought them for will be making a loss, the idea is that these particular products are just the start; they bring people to the ecommerce site, but those people leave having bought much more, and, most importantly, they will have bought items that make a profit. The loss leader is the bait, in other words, to bring the customers flooding in. This strategy is a risk, it’s true, but it’s a calculated risk, and we’ve put together some of the biggest benefits so that you can see how selling loss leading products might help you too.
It’s Not The Same As A Race To The Bottom
When you set the pricing for a loss leader, you are looking to price these items at just below profit. You are not, therefore, duty bound to price your products as low as possible in a ‘race to the bottom’. In fact, this isn’t something we recommend at all, as all it does is devalue your products and your business, and it makes it difficult to sell anything else at the true price because the difference between your loss leader and everything else will be so vast.
It’s best to price low but not so low that you then are only selling your loss leading goods and nothing else, losing money at every turn.
The Risk Is Small
Every decision made in business will have at least some small element of risk to it. That’s how businesses grow and thrive; it’s how they become more and more successful. If you just stick to what you’ve always done and never change anything, you’ll get what you’ve always got in the past, but you won’t get anything more than that.
So yes, you might get what are known as ‘cherry pickers’ on your site, which is not exactly what you want, it’s true. Cherry pickers are customers who browse around as many sites as possible and will only ever buy the cheapest of items – and they won’t be back for more. However, the majority of people will be back. Even if they don’t buy anything other than your loss leader on their first visit, if you provide them with a good service and if the product they have bought is of good enough quality, they will remember you. They will return when they need something else. They will tell others about the great website they found. You will grow.
New Markets
Another benefit of using the loss leader strategy in your business and your marketing is that it will enable you to venture into more markets. You can try out new products, for example, and you can enter new territories which you may have shied away from before.
New markets are hard in business. You have to get past customer loyalty which might have been something that has been building for many years, even decades for one thing. Plus, although there are early adopters and those who like to try new things, most people, once they have found something they like, will stick with it. We are all creatures of habit.
We are all creatures of habit unless, of course, it comes to money, because the desire to save money will quickly override the desire to stick with the tried and tested. Therefore, by opting to use loss leaders to entice customers in, you can persuade even the most loyal of your competition’s customers to at least look at what you have to offer, and that’s a good start.
An Equal Footing
Your business might not have the budget to create a huge advertising campaign, especially if you are selling something similar to a much larger, multinational company that has millions and millions of pounds at its disposal. Yet there is a way to get on a (fairly) equal footing with those big companies – you’ve guessed it, it’s the loss leader.
When you have well priced loss leaders that people want, and when the rest of your products and services are great value, and you do what you do extremely well, you can be a lot more visible without having to spend every penny you have on advertising which may or may not work. Instead, you can rely on your products and your growing reputation to do the work for you (with a small advertising campaign on the side) and still become much more successful.
Famous Examples
If you’re wondering whether you have ever seen a loss leader advertised, or even if you’ve ever bought one, the answer is that yes, you probably have. Many of those items that you’ve come across through advertising, word of mouth, or simple browsing that you spotted and that made you wonder how they could be selling them that cheap are probably loss leaders. It’s not that the company selling them got a great deal, or that they bought a massive amount and got them cheaper (not always, anyway); instead, it’s the business owner choosing to sell those items at a loss as part of their business strategy.
Take the Kindle from Amazon, for example. This is a loss leader. Where else could you buy a tablet with as much capability as this one for the prices (bundled or on their own) that Amazon sell them for? The truth is you couldn’t, and you can’t. The point is, Amazon know that once you have the Kindle, you’ll be back to buy the apps, the games, the films, the books, and the music. You will be back. They are counting on it.
Conclusion
When you run a business there are many different marketing strategies to consider, and although loss leaders are excellent ideas for some businesses, they might not work for yours. Take everything into account before you go down this route, and have a proper pricing and marketing strategy in mind when you are planning your attack. If you don’t, you run the risk of losing too much and not being able to recoup it.
