Loss leader

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A loss leader (also leader)[1] is a pricing strategy where a product is sold at a price below its market cost[2] to stimulate other sales of more profitable goods or services. With this sales promotionmarketing strategy, a "leader" is used as a related term and can mean any popular article, i.e., one sold at a normal price.[3]

Strategy[edit]

One use of a loss leader is to draw customers 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.

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.[4] 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.[5]

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.

Loss leaders can be an important part of companies' marketing and sales strategies, especially during dumping campaigns.

Characteristics of loss leaders[edit]

Some examples of typical loss leaders include milk, eggs, rice, and other inexpensive items that grocers would not want to sell without other purchases.

Examples[edit]

Record albums[edit]

The Warner/Reprise Loss Leaders were a series of promotional sampler compilation albums released by Warner Bros. Records throughout the 1970s. Each album (usually a 2-record set) contained a wide variety of tracks by artists under contract to Warner Bros. and its subsidiary labels (primarily Reprise Records); often these were singles, B-sides, non-hit album tracks, or otherwise obscure material, all designed to arouse interest in the artists' regular albums. Warner advertised the Loss Leaders albums by inserting special illustrated inner sleeves in all of its regular album releases, listing all of the currently available Loss Leaders and including an order form. Each Loss Leader double album was priced at $2USD, significantly less than a comparable regular-release double album of the time. The first Loss Leaders compilation was The 1969 Warner/Reprise Songbook, featuring a wide range of artists from Miriam Makeba to the Mothers of Invention; the last of the original series was the punk & new wave-themedTroublemakers in 1980.[6][7]

Videocassettes[edit]

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.[8]

Automobiles[edit]

Chevrolet's Corvette was originally intended in the 1950s to be an "image builder" and loss leader for General Motors, the idea being that men would go to showrooms to look at this "automotive Playboy Bunny"—which they knew they could not afford—and end up purchasing a lower-cost model. However, it enjoyed significant sales successes in the 1960s and produced a substantial annual profit.[9][10]

Perishable food[edit]

Supermarkets sell food staples such as sugar or milk at less than the cost at which they were purchased in order to draw customers to their business. In the case of milk, dairy farmers claim that so-called "price wars" are devaluing milk in the minds of consumers.[11]

Inkjet printers[edit]

Inkjet printers are commonly sold at a loss. The printers usually use proprietary ink cartridges so that consumers have to buy proprietary ink refill cartridges from the manufacturer. The printer manufacturer makes the money back from the printer sale via ink sales.[12]

Video games[edit]

Video game consoles have commonly been sold at a loss during launch and/or a number of years after launch with the goal of getting the most number of units to consumers. Console manufacturers then recover money from the royalties out of software sales.

See also[edit]

References[edit]

  1. ^ Leader, The American Heritage Dictionary of the English Language: Fourth Edition, Houghton Mifflin Company, 2000.
  2. ^ Loss Leader, The American Heritage Dictionary of the English Language: Fourth Edition, Houghton Mifflin Company, 2000.
  3. ^ Leader, Random House Unabridged Dictionary, Random House, Inc., 1997.
  4. ^ Van den Poel Dirk, Jan De Schamphelaere, Geert Wets (2004), "Direct and Indirect Effects of Retail Promotions," Expert Systems with Applications, 27 (1): 53–62.
  5. ^ Vindevogel B., Dirk Van den Poel, and Geert Wets (2005), "Why promotion strategies based on market basket analysis do not work?". Expert Systems with Applications, 28 (3): 583–590.
  6. ^ History's Dumpster: The Warner/Reprise Loss Leaders
  7. ^ Dustbury.com: Warner/Reprise Loss Leaders
  8. ^ Robert C. Post (October 2005). "Henry Kaiser, Troy Ruttman, and Madman Muntz: three originals". Technology and Culture (Johns Hopkins University Press) 46 (4). ISSN 0040-165X. 
  9. ^ Easterbrook, Gregg (12 January 2011). "Cars on the Catwalk". Reuters Blogs. Retrieved 8 August 2012. 
  10. ^ "1970 Chevrolet Corvette Coupe". Car and Driver. September 1969. Retrieved 8 August 2012. 
  11. ^ Poulter, Sean (14 January 2011). "Farmers fuming as supermarkets sell milk at half price of water". Daily Mail. Retrieved 8 August 2012. 
  12. ^ Paul Suggett. "Loss Leader – Definition Of The Term "Loss Leader"". About.com.