What is Loss leader?
A loss leader is a product or service offered at a price below its production cost or market value. The purpose is to attract customers and encourage additional purchases, with the expectation of offsetting losses elsewhere.
Loss leader
Introduction: A loss leader is a pricing strategy where a product is sold at a price below its market cost to stimulate sales of more profitable products or services. This tactic is used by retailers to attract customers with the hope that they will make additional purchases of higher-margin items, offsetting the losses incurred on the loss leader. The effectiveness of a loss leader strategy hinges on the ability to convert the initial sale into additional purchases through upselling, cross-selling, or simply increasing foot traffic and volume of sales. While effective in the short term for capturing market share or clearing out inventory, it's important for businesses to carefully manage this strategy to avoid long-term profitability impacts.
Key Considerations for Loss Leader Strategy:
- Product Selection: Choosing products that appeal widely and are likely to drive additional sales.
- Inventory Management: Ensuring sufficient stock of both loss leaders and complementary high-margin products.
- Consumer Perception: Managing pricing strategically to maintain brand value and avoid conditioning customers to expect unsustainable discounts.
- Legal Implications: Being aware of regulations regarding predatory pricing and ensuring the strategy complies with local laws.
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