Recently, I came across a deal that seemed too good to be true. The prices being quotes for services at a particular business left me thinking that this entrepreneur couldn’t possibly be making money on the services, at those prices. Guess what? I was right for the most part. However, it wasn’t a case of a clueless businessperson running an unprofitable business. Instead, the businessperson was using the pricing strategy that is commonly known as loss leader pricing.
Inc.com defines loss leader pricing as “an aggressive pricing strategy in which a store sells selected goods below cost in order to attract customers who will, according to the loss leader philosophy, make up for the losses on highlighted products with additional purchases of profitable goods.”
This strategy is usually beneficial to all involved when used correctly. A business can entice customers through the door by offering “too good to be true” deals that possibly wouldn’t be available elsewhere in the market. The business can then recoup its losses on the items being sold at cost or below cost by also offering convenient shopping of complementary products or services at the same location.
However, like most things, the strategy comes with its pros and cons. In an article “The Pros and Cons of Loss Leader Pricing for Online Retailers.” Demi Oba shared the following:
n This strategy is a great way to enter a new market, as the deep discount on loss leaders removes the risk a customer faces when trying a new brand.
n Loss Leader can help you promote other products in your business, as by strategically selecting your loss leader products, you can use them to stimulate sales of other complementary products.
On the flip side, however, Oba explained that:
n Deep loss leader discounts can hurt your brand perception, as deep discounts can cause customers to confuse low prices for low quality.
n Loss leader strategies can condition customers to wait for discounts.
While loss leader is common in retail businesses, it can be applied to other businesses too. Try it, it may be just what your business needs to create the pull.
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