Loss Leader - Pricing & Marketing strategy - Micro-Economics at play

A Loss leader is a marketing & pricing strategy.

Here, a product or service that is offered at a price that is not profitable.

Usually the product is priced lower than its production cost.

It is also called Penetration pricing as the manufacturer attempts to penetrate the market by pricing its products low.

The loss leader is usually a product that customers purchase frequently, and thus they are aware that its unusually low price is a bargain.

Purpose:

1.

To attract new customers.

2.

To sell additional products and services to those customers.

3.

To force competitors out of business.

4.

Hope is that once the customer buys the product from the store/website/brand, s/he will buy other products and become loyal to the store/website/brand.

5.

Some retailers place loss leaders at the back of their stores so consumers will have to walk by other, more expensive products to get to them.

6.

Introductory pricing can also be a loss leader, where company offers a low introductory rate to entice clients to use a product. Then, after snagging the client, the company raises its prices.

Examples:

1.

Gillette gives their razor units away for free knowing that customers must buy their replacement blades, which is where the company makes its profit.

2.

Microsoft's Xbox One video game console.

It was sold at a low margin per unit, as Microsoft knew that there was potential to profit from the sale of video games with higher margins and subscriptions to the company's Xbox Live service.

Flipkart selling essential goods at Rupee 1

Risks & Failures:

1.

Loss leader pricing fails for those some consumers who leave without buying other products or subscribing to the brand. This consumer practice of jumping from shop to shop and picking up loss leader items is called Cherry Picking.

2.

Considered a controversial strategy, loss leading is banned in 50% of U.S. states and some European countries.

3.

Usually the small-business competitors (biz owners) are hit most badly when a large corp. decides to go loss-leading way for some of its products.

4.

Even the suppliers to companies who follow a loss leader strategy experience pressure to keep their own prices low so that the company using a loss leader strategy can continue to do so.

5.
Customers can stockpile the loss leaders.
or
Even the small businesses can stockpile the loss leaders.
To counter such risks the loss leaders should be provided with limits.

Credits:

Investopedia.com/terms/l/lossleader.asp

En.Wikipedia.org/wiki/Loss_leader