Loss Leader Pricing Strategy

Loss leader pricing is a strategy where certain products are priced below cost to attract customers, with the goal of increasing overall sales and promoting higher-margin purchases. Retailers use this approach to generate foot traffic or boost online sales by offering low prices on popular items. The expectation is that customers will also buy additional products at regular prices, offsetting the initial loss. Common examples include discounting essential items like milk, bread, or electronic accessories.

The main advantage of loss leader pricing is its ability to drive customer traffic and encourage repeat business. However, it requires careful selection of the lead product to ensure that the losses incurred are compensated by profits from other items. This strategy is particularly effective in industries where customers are likely to make additional purchases, such as supermarkets, department stores, and e-commerce platforms.

Despite its benefits, loss leader pricing can be risky if customers purchase only the discounted item and leave, failing to generate the anticipated revenue. To mitigate this risk, companies often pair loss leaders with complementary products to encourage broader purchases and maximize profitability.

An example of loss leader pricing is a grocery store selling milk or eggs at a price below cost to attract customers. Once in the store, customers are likely to purchase other items at full price, such as snacks or cleaning supplies, which offsets the loss on the discounted product.

Loss leader menu pricing refers to a restaurant pricing certain menu items, such as appetizers or drinks, at a very low price to draw in customers. The goal is to encourage customers to order higher-margin items like main courses, desserts, or premium beverages during their visit.

A leader pricing strategy example is an electronics store heavily discounting accessories like HDMI cables or phone cases. These low-cost items attract customers who may also purchase higher-margin products, such as TVs or smartphones, during the same visit.