Loss Leader Strategy in Retailing

Contributed by Richa Kapoor

Loss leaders is a time honored pricing strategy adopted by retailers worldwide to attract consumers to the stores. The intent of this pricing strategy is to not only have the customer buy the (loss leader) sale item, but other products that are not discounted. The rate of success of this strategy has been enormous worldwide which is being replicated in the Indian Market too but with the Indian Retail market opening up, retailers introducing newer product categories and many retailers entering the market.
It has become crucial for retailers to adopt strategies like loss leaders. But, to be able to understand the concept thoroughly.

What is a loss leader?
A loss leader is a pricing strategy which involves selling a product 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. This is a commonly used technique to attract customers via bargain on necessities and sell to them products which they don't require; this will help in generation of profits.

Some Common Strategies:
Usually retailers place the loss leader at the end of a store, so that purchasers walk past racks of other displayed goods which have higher profit margins.
As loss leader item is a product that customers purchases frequently—thus the retailer ensures that the offered price is a bargain.
Retailers offer limited items as loss leaders, which discourages stockpiling by customers, which compels consumers to make repeated visits.
The retailer sets limitations on the quantity that one purchaser can make (e.g., " Buy One Get 20% off on second").

When and Why a Loss Leader Strategy is used?
Move Overstock: A retailer can use the loss leader strategy to encourage the sales of products which are the declining stage of their life cycle or if a retailer has inventory that isn't moving or if he is overstocked on a particular item, a loss leader can move it. By cutting the price of such an item, a retailer not only frees up the shelf space and reduce inventory, but also increase cash flow.

Increased Footfalls: Using loss leaders as a marketing tool can help gain new customers and increase return visits. Consumers like a bargain and will likely come back to shop.

Attracting Customers from Different Sectors: Retailers use loss leader strategy to attract customers from different age groups, backgrounds and demographics.. For example, recently a leading supermarket introduced the sale of jeans from a leading jeans manufacturer. The clothing was purchased from a wholesaler and priced competitively which results in low profit. This helped in attracted young consumers who are not the target consumers for a supermarket.

Loss Leader Precautions
Though there have been successes in loss leader pricing, but a retailer must be aware of some obstacles to the process. If done incorrectly, loss leaders can actually cause the business to lose money.

§ A loss leaders strategy should be used only when it's assured that the lost profit can be countered by the sales of other products or services. It should be made sure that there is a significant quantity of the sale item in stock

§ Not all manufacturers and suppliers allow their products to be priced under their minimum advertised price or less than what their other dealers are selling the same item. As it may be perceived as damage to the brand image of the manufacturer. Thus, it may be good idea to contact the manufacturers or suppliers before proceeding with the strategy.

§ In some states it is forbidden to sell products below cost. In recent years, lawsuits have emerged claiming loss leader pricing strategies to be equivalent to illegal business practices.

§ Competitors can take advantage of a retailer's bargain and purchase the loss leader goods from the retailer to sell in their own shop. In which case, they could further reduce the price giving them a competitive advantage over you, or sell it at a price with a view to making a small profit.

The loss leader strategy is used primarily to attract customers to a retail store through the introduction of a bargain. Implementing the loss leader strategy can be risky and therefore needs to be considered that it is the right approach for penetrating the market.

References:
Bizhelp24, Retail.about, Wikipedia