Loss leaders

If you're a retailer, you'll be very aware that sometimes consumers need a little bit of extra encouragement to come through your door. Using loss leaders is a well-established way to do this -as long as you get your strategy right.

What is a loss leader?

• A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store.
• Loss leaders make up for the losses they incur by enticing consumers to make further purchases of profitable goods while they are in the shop.
• If you undercut your competitors on their pricing, customers will come to you rather than turn to them - which means using loss leaders can help drive customer loyalty.
• While loss leaders are a useful way to tempt customers into spending money on your goods, they are not without their controversy. In some American states, the strategy is seen as unscrupulous because it allows large retailers to use their spending power to crush smaller competitors.
• Using a loss leader can also be detrimental to relationships with suppliers, who may take a dim view of your strategy if it is having an effect on the number of orders they receive from other clients.

How to use loss leaders

• Make sure your business will be able to absorb the financial impact of using loss leaders. Conduct thorough market research to find out why customers come to your business and which products are popular enough to entice consumers through your doors.
• When you're deciding on a product to use as a loss leader, remember customer demand is likely to rise - so make sure you have enough of your chosen product in stock.
• Because you want them to attract attention, place your loss leaders somewhere obvious, but ensure consumers see as many of your other products as possible before they reach the loss leader. The back of the shop or surrounded by images of other products on a website is the best option.
• Change your loss leader or its merchandising every so often so consumers don't get too used to your pricing strategy.
• It's no use marking down a price if your consumers don't know about it - so if you are introducing a loss leader, remember to draw attention to it. Use posters, press, the internet and signage around the shop to let consumers know - you may even want to draw a comparison with competitors.

Checklist

• Using a loss leader can be detrimental to relationships with suppliers
• Make sure your business will be able to absorb the financial
• Make sure you have enough of your chosen product in stock.
• Place your loss leaders somewhere obvious
• Change your loss leader or its merchandising every so often
• Remember to draw attention to your loss leaders

Examples

• When it came out in September 2009, Asda sold much-hyped Dan Brown novel The Lost Symbol for £5 - way below its £18.99 recommended retail price (RRP). There were speculations the supermarket was losing £4 a book.
• Inkjet printers are often sold to consumers way below cost price. The difference is made up in the sale of the ink cartridges.
• The iPhone (RRP £199) was given away for free to O2 customers who made up the losses by paying £45 a month for a phone contract.