Loss leader pricing is a marketing strategy where a business sells a product at a price below its cost to attract customers. The intent is not to make a profit on the loss leader item itself, but to drive customer traffic and encourage the purchase of other higher-margin products. This approach is often employed in retail environments, where the low price on a staple item lures customers into the store, increasing the likelihood of additional purchases that contribute to overall revenue.
For example, a grocery store may offer a popular brand of cereal at a steep discount to entice shoppers. Once customers come in for the cereal, they are likely to purchase other items like milk, fruit, and snacks, ultimately increasing the store's overall sales and profit margins despite the loss on the cereal.
Loss leader pricing is a strategic approach where businesses intentionally sell a product or service at a price below its market cost to attract customers. The goal isn't to profit from the specific product being sold at a loss, but rather to drive traffic and encourage additional purchases of higher-margin products or services. This method is commonly used in retail, particularly in supermarkets and e-commerce, where a low-priced item serves as bait to increase overall sales volume. For instance, a supermarket may sell milk or bread at a significantly reduced price, knowing that once customers are in the store, they are likely to buy other full-priced items, such as snacks, cleaning supplies, or premium goods. While the business may lose money on the initial sale, the increased foot traffic and the likelihood of additional purchases often offset the loss. This pricing strategy can be highly effective in competitive markets, but it carries risks. If not managed carefully, loss leader pricing can lead to reduced profit margins and even attract price-sensitive customers who only buy the discounted product.