Loss leader pricing is a well-known marketing strategy used in a variety of business sectors. It is where a store or a vendor reduces the price point of some of its goods to below cost to increase its sales of other, more profitable goods. Businesses use this strategy to divert customer traffic away from their competitors.
Below, we list 25 loss leader pricing examples to draw in customers and increase sales.
1. Introductory Pricing
Have you ever been enticed to sign up to an app because the first 7 days are free? That is an example of a marketing strategy called “introductory pricing.” Introductory pricing involves a company offering a lower price (or zero pricing) on a product for a limited time before selling it for the regular price.
This loss leader strategy benefits businesses, such as DirectTV Stream, Netflix and Comcast, by creating a new customer base for the product. Often the product is a new product, but not always. The company increases the market share of the product, and then, over time, the product price is raised to create a profit on the item.
2. Liquidating Excess Merchandise
This loss leader pricing model works by attracting customers to purchase a company’s excess products. Labor Day and after-Christmas sales, in particular, often consist of companies liquidating excess merchandise.
Other times when this tactic is commonly used is during the changing of seasons. Two key seasonal sales often occur early in the year and in the fall. January sales can be used to liquidate both winter items and leftover holiday goods, while back-to-school sales are used to attract customers searching for back-to-school clothing and supplies, while also aiming to sell them leftover summertime merchandise at deep discounts.
Businesses, from big-box stores like Macy’s and Dick’s Sporting Goods, to small or online businesses, attempt to use this strategy to increase sales, and depending on the business, also to help make room for upcoming inventory.
3. Store Placement
Can you remember going to your local grocery store because of a great sale on a certain item, only to come out with a cart full of groceries that weren’t on your list? You are not alone. Grocery stores, like Whole Foods and Kroger, are one of the most common businesses to use store placement.
This use of loss leader pricing involves placing items in locations that make the most sense, given the profit margins. For example, eggs and milk expire quickly, yet customers often purchase these products regularly, so they are usually placed at the back of the store.
By placing these products far out of reach, customers must walk by many other products, including higher-priced items strategically placed at the end caps of aisles that, when purchased, more than make up for the loss on the eggs and milk.
4. Branding for Value
Another use of loss leader pricing is branding for value. This involves when a business offers exceptional deals on its items that its competitors can’t beat. The goal in doing so is that their target customers will see their business as their first choice when considering where to shop due to the cost savings.
Often, customers will get used to the business offering the best prices, and become less diligent in price comparisons. And when in the store, customers will often add other items to their cart in addition to the sale item that first caught their attention. Costco, BJ’s, and other bulk retailers often use this method to attract customers looking for the best deals.
5. Holiday Shopping Specials
Ever hear about people lining up in front of a store at 6am on the morning of Black Friday, or people getting crushed by the stampede of people fighting for the only 10 TVs to be offered at a rock-bottom price? Those would be the sales wrapped as “holiday deals.”
On Black Friday, retailers will advertise specific products at a steep discount to get buyers into its store, where the retailer can then sell them other merchandise. This loss leader example, as with the others, pulls shoppers away from the retailer’s competitors.
Marketing products as “holiday deals” is a widespread loss leader pricing technique used by large retailers such as Best Buy and Target. The deals offered on Black Friday are arguably the most widespread and most well-known of holiday shopping specials in the U.S.
6. Landing Page Promotion
E-commerce retailers will use landing page promotions to draw in customers. This entails placing cheaper products on the landing pages of their websites. Online stores, such as Wayfair and Brooklinen, utilize this method in hopes that new customers will be enticed by the low prices and purchase additional or complementary products along with the low-priced item.
7. Free Samples and Freemium Services
One way large corporations that sell products (as opposed to services), like grocery stores, big-box retail stores, and small businesses, attract new customers is by offering free samples. A free sample is a top-loss leader product, as getting something for free is an attractive way to reach a new market.
The goal of providing free samples is that customers will try out the new product or service risk-free, and if they enjoy it, they are more likely to return and purchase that product at regular pricing.
Similarly, Freemium pricing is the services version of free samples or freebies. It is when a service is offered for free at its most basic level, and often the user gets hooked and starts paying for upgrades that enhance the service.
8. The Video Game Market
Video game consoles have a particularly interesting place in the loss leader world. Video game consoles are often sold at or even below cost. The reason retailers, such as GameStop and the Nintendo eShop, do this is to encourage their customers to purchase video games and console accessories at a higher profit margin.
Rebate promotions don’t offer a discount on the purchase of a product right when it’s bought. Instead, they give customers a specified amount after purchase (often after submitting a rebate form). This marketing strategy allows the retailers, like Clearasil and Olay, to gather information from the customer that they wouldn’t be able to attain through a discount offered at the point-of-sale.
The customer information acquired can then be added to the company’s mailing list, and the retailer can promote additional products to draw the customer in again, hopefully. Also, customers regularly use the discounted price in their decision-making for the product, but then forget to submit the rebate form and actually receive the discount.
10. Razors and Razor Blades
Companies such as Gillette and Schick sell their razors at a minimum profit margin packaged with one or two sample blades. However, once it becomes time for the customer to replace the razor blades, the price is much higher. The razor companies recognize that the customer has already bought the razor and will need to purchase replacement blades, so they sell the blades with a much higher profit margin (like computer printers below).
Similar in concept to razors and razor blades, printer companies, like HP and Brother, make the bulk of their profits off of the sale of ink and toner. While the printers they offer can be considered a great deal, as they are sold for a lost profit much of the time, the ink and toner that customers need in order to continue using the printers are what the company uses as profitable products, selling these items at much higher margins.
12. Product Page Recommendations
Retailers like LeSportSac and Sephora often use product page recommendations as a loss leader pricing tool. Companies attempt to increase the number of products sold in a single transaction by recommending relevant or complimentary products to shoppers based on what they are purchasing or looking at while on their website.
13. Rebate Applications
In addition to mail-in rebate promotions, there are also rebate applications available that offer customers money back after they make a purchase. Apps like Ibotta and Rakuten use this method to increase brand awareness and promote the sale of products from various manufacturers. Companies use rebate applications to promote new products and higher-priced inventory, as well as to reduce overstock through this loss leader pricing strategy.
14. Selling Slow Inventory
Stores will often use loss leader pricing to push the sales of inventory that is moving slower than desired. Kohl’s, Nordstrom, and other retailers will offer various promotions, including deep discounts, to hold less merchandise, increase the amount of shelf space, and increase the company’s cash flow.
15. Penetration Pricing
Used to attract customers to a new product launch or new service, penetration pricing entails a business pricing the new product or service low initially. The low price is used to bring increased customer awareness to the new offering, hoping that the customers will continue to stay on board once the product or service increases to its target “normal” pricing level.
For example, penetration pricing is a popular marketing strategy used by credit card companies, like Discover and Citi, when they offer a 0% or low introductory rate APR promotion for opening a new credit card. This method can also be seen with most cash-back credit cards that offer cash back on purchases, which effectively reduces the purchase prices of the goods and services purchased, but only up to a cap.
16. Being Known for Low Prices
Stores that want to be known for having low prices significantly benefit from loss leader pricing strategies. Brick-and-mortar stores like Ollie’s Bargain Outlet, Ross Dress for Less and TJ Maxx, use a business strategy where they purchase closeout deals from vendors well below wholesale pricing and then pass the deal on to their customers.
The customers can then purchase the products below market cost and are likely to return for other purchases, as they recognize the store has some of the best deals repeatedly.
17. Hardware and Tools
Hardware stores, like Ace Hardware or Do It Best, use larger tools as loss leader items regularly. The stores will sell electric saws, drills, and other larger items at market cost or even below, doing so with the expectation that customers will purchase accessories, such as drill bits, saw blades, or stands to go along with the equipment. These accessories are typically priced at a much higher profit margin and make up for the loss leading from the larger tool sales over time.
18. Clearing Shelf Space
Using an aggressive pricing strategy is a great way for business owners to make more room on their store shelves when they need space for new inventory. Clothing and footwear retailers, like Footlocker and American Eagle Outfitters, will often offer closeout deals on merchandise from previous seasons to make room for new merchandise in the store.
19. Tracking Advertising
Loss leader pricing is one way for retailers, such as JCPenney and Nordstrom, to see how well they are reaching their customers. One of the examples of a loss leader pricing strategy that is used to do this is tracked advertising. When a loss leader sale is advertised, stores can determine how many of the shoppers visiting their stores are doing so because of their ads. This can help store executives determine whether their advertising strategy is successful or needs to be changed.
Stores that sell baby and children’s goods recognize that diapers are an essential item. Therefore, by offering the best price on diapers, stores like buybuy BABY and Babylist can entice parents into their store. Once the parents are there and browsing around, the hope is that they will see additional items or impulse buys that they want to purchase, such as bottles, toys, or bibs.
21. Liquidating Inventory
Sometimes, companies will overestimate the actual demand for a product, leaving them with an excess of the product. Companies like Hot Topic and Zumiez will liquidate inventory that would otherwise just be taking up space by selling it at market cost or below and moving their attention to the sales of other, more profitable products.
One common product used in loss leader pricing is the smartphone. Companies, like AT&T and Verizon, will sell smartphones at market cost or below with the intention of achieving a profitable return when customers are locked into a contract with them. Their customers’ monthly bills are where the cell phone service providers achieve their profits in the long run.
In addition, companies such as Apple and Samsung may also sell their phones at or below market cost, planning to make up for the losses through the sale of smartphone accessories, like cases, charging devices, and headphones.
Loss leader pricing can be used to cross-promote items within a store. For example, popular items can be placed strategically near other things that have a higher profit margin within the store. Another way a business can use cross-promotion is by training employees to offer complementary items to go along with whatever the customer is purchasing. Stores such as Mac Cosmetics and Victoria’s Secret often have their employees use this strategy to increase sales.
24. Buy One, Get One Free
Retailers like CVS and Walgreens recognize that customers enjoy a good deal, especially when they get something for free. By offering a “buy one, get one free” deal, customers feel like they’re getting a big bonus by getting two items for one price, and businesses may even be able to cover the cost of both products for a single price with a higher margin.
This promotion also ensures the likelihood that customers will use the product for twice as long, hopefully leading to an excellent affinity for the product – thus increasing the chance they will return to purchase more.
25. Car Dealerships
Automobile dealers use loss-leader pricing by advertising the lowest price they can for a specific car or truck. However, when customers look at the fine print, they can see that it is only for a particular stock vehicle. Nonetheless, when a customer arrives to the car dealership to inquire about the ad, the dealer will hook the customer by telling the customer that they sold out of that vehicle but have other recommendations.
Overall, loss leader pricing is a common practice for retail businesses to boost business, whether through promoting steep discounts, impulse additional purchases, or other deals. The advantages of loss leader pricing are an effective way to increase customers and sales.
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