Loss leader
Encyclopedia
A loss leader or leader is a product sold at a low price (at cost or below cost) to stimulate other profitable sales. It is a kind of sales promotion
, in other words marketing
concentrating on a pricing strategy
. A loss leader is often a popular article. Sometimes leader is now used as a related term and means any popular article, in other words one sold at a normal price.
s into a store where they are likely to buy other goods. The vendor expects that the typical customer will purchase other items at the same time as the loss leader and that the profit made on these items will be such that an overall profit is generated for the vendor.
Loss Lead describes the concept that an item is offered for sale at a reduced price and is intended to lead to the subsequent sale of other items, the sales of which will be made in greater numbers, or greater profits, or both. It is offered at a price below its minimum profit margin—not necessarily below cost. The firm tries to maintain a current analysis of its accounts for both the loss lead and the associated items, so it can monitor how well the scheme is doing, as quickly as possible, thereby never suffering an overall net loss.
An example is a supermarket
selling sugar
or milk
at less than cost to draw customers to that particular supermarket.
Marketing academics have shown that retailers should think of both the direct and indirect effect of substantial price promotions when evaluating their impact on profit. To make a very precise analysis one should also include effects over time. Deep price promotions may cause people to bulk-buy (stockpile), which may invalidate the long-term effect of the strategy. This is the association rule
analysis.
When automobile dealerships use this practice, they offer at least one vehicle below cost and must disclose all of the features of the vehicle (including the VIN
). If the loss leader vehicle has been sold, the salesperson tries to sell a more upscale trim of that vehicle at a slightly discounted price, as a customer who has missed the loss leading vehicle is unlikely to find a better deal elsewhere. In actual practice, especially with luxury cars, the models that dealers stock on their lots contain many "options" such as leather upholstery and a moonroof, as the base vehicle without these amenities (known as a "stripper") is usually available only by special order from the factory (frequently for fleet use such as for taxicabs). Companies and dealerships follow this practice since considering these features as options is more lucrative than raising the price of the model and including these as "standard" equipment. This practice can be seen as a form of deceptive advertising, and is illegal in some jurisdictions, and falls under the strategy of bait and switch
deception tactics.
Some examples of typical loss leaders include milk, eggs, rice
, and other inexpensive items that grocers wouldn't want to sell without other purchases.
, is similar to the loss leader business model. Razor
handles are given away for free or sold at a loss, but sales of disposable razor blades are very profitable. Since the late 1990s, this model has proven very popular and successful for inkjet printer
manufacturers, where profit is derived from the sale of expensive ink cartridges.
In 1910, the City of Pasadena criticized the private Edison Gas and Electric Company for giving away free electric lamps to solicit new electricity subscribers.
In 1979, American businessman Earl Muntz
decided to sell blank tapes and VCRs
as loss leaders to attract customers to his showroom, where he would then try to sell them highly profitable widescreen projection TV systems of his own design. His success continued through the early 1980s.
Inkjet
and laser printer
s are also often sold to retail customers below their margin price and could also be viewed as loss leaders. Some of the printers, especially the entry-level models, are sold at a loss-leading price which seems apparently affordable to most consumers, but they pay the regular price for ink cartridges or toner, and specialty papers supplied by the manufacturer. The manufacturer also limits the customers' options by not supporting third party ink, including refills. This analysis more closely parallels the strategies of tying and bundling products, however.
Loss leaders can be an important part of companies' marketing and sales strategies, especially during dumping
campaigns.
Video game console
s have often been sold at a loss while software and accessory sales are highly profitable to the console manufacturer, a tactic first utilized in the sixth generation era
. Sony and Microsoft, with their PlayStation 2
and Xbox
, had prohibitively high manufacturing costs so they were forced to sell their consoles at a loss, and these losses widened especially in 2002–2003 when both sides tried to grab market share with price cuts. Nintendo
had a different strategy with its GameCube, which while technically inferior was also considerably less expensive to produce than its rivals, so it retailed at break-even or higher prices. In the current generation of consoles; both Sony
and Microsoft
have sold their consoles, the Playstation 3
and Xbox 360
, respectively, at a loss and made up for it through game software and accessory profits. For this reason, console manufacturers aggressively protect their profit margin against piracy by pursuing legal action against carriers of modchips and jailbreaks.
Sales promotion
Sales promotion is one of the four aspects of promotional mix. Media and non-media marketing communication are employed for a pre-determined, limited time to increase consumer demand, stimulate market demand or improve product availability...
, in other words marketing
Marketing
Marketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
concentrating on a pricing strategy
Pricing strategies
Pricing strategies for products or services include the following:-Competition-based pricing:Setting the price based upon prices of the similar competitor products.Competitive pricing is based on three types of competitive product:...
. A loss leader is often a popular article. Sometimes leader is now used as a related term and means any popular article, in other words one sold at a normal price.
Sales of other items in the same visit
One use of a loss leader is to draw customerCustomer
A customer is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services...
s into a store where they are likely to buy other goods. The vendor expects that the typical customer will purchase other items at the same time as the loss leader and that the profit made on these items will be such that an overall profit is generated for the vendor.
Loss Lead describes the concept that an item is offered for sale at a reduced price and is intended to lead to the subsequent sale of other items, the sales of which will be made in greater numbers, or greater profits, or both. It is offered at a price below its minimum profit margin—not necessarily below cost. The firm tries to maintain a current analysis of its accounts for both the loss lead and the associated items, so it can monitor how well the scheme is doing, as quickly as possible, thereby never suffering an overall net loss.
An example is a supermarket
Supermarket
A supermarket, a form of grocery store, is a self-service store offering a wide variety of food and household merchandise, organized into departments...
selling sugar
Sugar
Sugar is a class of edible crystalline carbohydrates, mainly sucrose, lactose, and fructose, characterized by a sweet flavor.Sucrose in its refined form primarily comes from sugar cane and sugar beet...
or milk
Milk
Milk is a white liquid produced by the mammary glands of mammals. It is the primary source of nutrition for young mammals before they are able to digest other types of food. Early-lactation milk contains colostrum, which carries the mother's antibodies to the baby and can reduce the risk of many...
at less than cost to draw customers to that particular supermarket.
Marketing academics have shown that retailers should think of both the direct and indirect effect of substantial price promotions when evaluating their impact on profit. To make a very precise analysis one should also include effects over time. Deep price promotions may cause people to bulk-buy (stockpile), which may invalidate the long-term effect of the strategy. This is the association rule
Association rule learning
In data mining, association rule learning is a popular andwell researched method for discovering interesting relations between variablesin large databases. Piatetsky-Shapirodescribes analyzing and presenting...
analysis.
When automobile dealerships use this practice, they offer at least one vehicle below cost and must disclose all of the features of the vehicle (including the VIN
Vin
Vin may refer to:*Voltage input, an alternative form for Vin-People:*Vin Diesel*Vin Scully*Vin Suprynowicz*Vin, the name of a character from the video games Jak II and Jak 3*a diminutive of the name "Vincent"...
). If the loss leader vehicle has been sold, the salesperson tries to sell a more upscale trim of that vehicle at a slightly discounted price, as a customer who has missed the loss leading vehicle is unlikely to find a better deal elsewhere. In actual practice, especially with luxury cars, the models that dealers stock on their lots contain many "options" such as leather upholstery and a moonroof, as the base vehicle without these amenities (known as a "stripper") is usually available only by special order from the factory (frequently for fleet use such as for taxicabs). Companies and dealerships follow this practice since considering these features as options is more lucrative than raising the price of the model and including these as "standard" equipment. This practice can be seen as a form of deceptive advertising, and is illegal in some jurisdictions, and falls under the strategy of bait and switch
Bait and switch
Bait-and-switch is a form of fraud, most commonly used in retail sales but also applicable to other contexts. First, customers are "baited" by advertising for a product or service at a low price; second, the customers discover that the advertised good is not available and are "switched" to a...
deception tactics.
Characteristics of loss leaders
- A loss leader may be placed in an inconvenient part of the store, so that purchasers must walk past other goods which have higher profit marginProfit marginProfit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.Net profit Margin = x100...
s. - 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.
- The retailer will often limit how much a customer can buy.
- Some loss leader items are perishable, and thus can't be stockpiled
Some examples of typical loss leaders include milk, eggs, rice
Rice
Rice is the seed of the monocot plants Oryza sativa or Oryza glaberrima . As a cereal grain, it is the most important staple food for a large part of the world's human population, especially in East Asia, Southeast Asia, South Asia, the Middle East, and the West Indies...
, and other inexpensive items that grocers wouldn't want to sell without other purchases.
Examples
The razor and blades business model, pioneered by American businessman King GilletteKing C. Gillette
King Camp Gillette was an American businessman popularly known as the inventor of the safety razor, although several models were in existence prior to Gillette's design...
, is similar to the loss leader business model. Razor
Razor
A razor is a bladed tool primarily used in the removal of unwanted body hair through the act of shaving. Kinds of razors include straight razors, disposable razors and electric razors....
handles are given away for free or sold at a loss, but sales of disposable razor blades are very profitable. Since the late 1990s, this model has proven very popular and successful for inkjet printer
Inkjet printer
An inkjet printer is a type of computer printer that creates a digital image by propelling droplets of ink onto paper. Inkjet printers are the most commonly used type of printer and range from small inexpensive consumer models to very large professional machines that can cost up to thousands of...
manufacturers, where profit is derived from the sale of expensive ink cartridges.
In 1910, the City of Pasadena criticized the private Edison Gas and Electric Company for giving away free electric lamps to solicit new electricity subscribers.
In 1979, American businessman Earl Muntz
Madman Muntz
Earl William "Madman" Muntz was an American businessman and engineer who sold and promoted cars and consumer electronics in the United States from the 1930s until his death in 1987. He was a pioneer in television commercials with his oddball "Madman" persona – an alter ego who generated publicity...
decided to sell blank tapes and VCRs
Videocassette recorder
The videocassette recorder , is a type of electro-mechanical device that uses removable videocassettes that contain magnetic tape for recording analog audio and analog video from broadcast television so that the images and sound can be played back at a more convenient time...
as loss leaders to attract customers to his showroom, where he would then try to sell them highly profitable widescreen projection TV systems of his own design. His success continued through the early 1980s.
Inkjet
Inkjet printer
An inkjet printer is a type of computer printer that creates a digital image by propelling droplets of ink onto paper. Inkjet printers are the most commonly used type of printer and range from small inexpensive consumer models to very large professional machines that can cost up to thousands of...
and laser printer
Laser printer
A laser printer is a common type of computer printer that rapidly produces high quality text and graphics on plain paper. As with digital photocopiers and multifunction printers , laser printers employ a xerographic printing process, but differ from analog photocopiers in that the image is produced...
s are also often sold to retail customers below their margin price and could also be viewed as loss leaders. Some of the printers, especially the entry-level models, are sold at a loss-leading price which seems apparently affordable to most consumers, but they pay the regular price for ink cartridges or toner, and specialty papers supplied by the manufacturer. The manufacturer also limits the customers' options by not supporting third party ink, including refills. This analysis more closely parallels the strategies of tying and bundling products, however.
Loss leaders can be an important part of companies' marketing and sales strategies, especially during dumping
Dumping (pricing policy)
In economics, "dumping" is any kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market...
campaigns.
Video game console
Video game console
A video game console is an interactive entertainment computer or customized computer system that produces a video display signal which can be used with a display device to display a video game...
s have often been sold at a loss while software and accessory sales are highly profitable to the console manufacturer, a tactic first utilized in the sixth generation era
History of video game consoles (sixth generation)
The sixth-generation era refers to the computer and video games, video game consoles, and video game handhelds available at the turn of the 21st century. Platforms of the sixth generation include the Sega Dreamcast, Sony PlayStation 2, Nintendo GameCube, and Microsoft Xbox...
. Sony and Microsoft, with their PlayStation 2
PlayStation 2
The PlayStation 2 is a sixth-generation video game console manufactured by Sony as part of the PlayStation series. Its development was announced in March 1999 and it was first released on March 4, 2000, in Japan...
and Xbox
Xbox
The Xbox is a sixth-generation video game console manufactured by Microsoft. It was released on November 15, 2001 in North America, February 22, 2002 in Japan, and March 14, 2002 in Australia and Europe and is the predecessor to the Xbox 360. It was Microsoft's first foray into the gaming console...
, had prohibitively high manufacturing costs so they were forced to sell their consoles at a loss, and these losses widened especially in 2002–2003 when both sides tried to grab market share with price cuts. Nintendo
Nintendo
is a multinational corporation located in Kyoto, Japan. Founded on September 23, 1889 by Fusajiro Yamauchi, it produced handmade hanafuda cards. By 1963, the company had tried several small niche businesses, such as a cab company and a love hotel....
had a different strategy with its GameCube, which while technically inferior was also considerably less expensive to produce than its rivals, so it retailed at break-even or higher prices. In the current generation of consoles; both Sony
Sony
, commonly referred to as Sony, is a Japanese multinational conglomerate corporation headquartered in Minato, Tokyo, Japan and the world's fifth largest media conglomerate measured by revenues....
and Microsoft
Microsoft
Microsoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...
have sold their consoles, the Playstation 3
PlayStation 3
The is the third home video game console produced by Sony Computer Entertainment and the successor to the PlayStation 2 as part of the PlayStation series. The PlayStation 3 competes with Microsoft's Xbox 360 and Nintendo's Wii as part of the seventh generation of video game consoles...
and Xbox 360
Xbox 360
The Xbox 360 is the second video game console produced by Microsoft and the successor to the Xbox. The Xbox 360 competes with Sony's PlayStation 3 and Nintendo's Wii as part of the seventh generation of video game consoles...
, respectively, at a loss and made up for it through game software and accessory profits. For this reason, console manufacturers aggressively protect their profit margin against piracy by pursuing legal action against carriers of modchips and jailbreaks.