The income generating power of loss leaders
A loss leader is simply a product/service that is sold either at cost or below cost in order to stimulate sales of other products or services. However, selling large amounts of loss leaders can have a detrimental effect on your long-term business so they have to be used with care. Here are some characteristics of loss leaders
- A loss leader is normally put in an inconvenient place in a store or website, this way people have to go through, and be tempted by, other more profit generating products/services. A typical example of this is placing the loss leader at the back of the store.
- 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.
A common example of loss leaders today are mobile phones, companies tempt customers to their network by offering a subsidised handset, the better the handset and the more subsidised it is the longer the mobile phone contract will be.
Some supermarkets will carry indefinite loss leaders such as their own brand baked beans sold at below cost price, this makes a great marketing tool for them and entices people to their store. Overall the cost to them is minimal.
Loss leaders are a great way to attract customers to your business and have been proven to work by many companies bug and small. The only thing you need to watch out for is the total cost and effectiveness of running a loss leader.
