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Loss-leader Pricing

 

DisciplinesMarketing > Pricing > Loss-leader Pricing

Description | Example | Discussion | See also

 

Description

Price some items so low that you are making a loss on them, but also so you will attract many customers who will spend on other products, more than making up for what you are losing on the loss-leader.

Use the loss-leader pricing for a limited period only to suggest limited availability and so enhance the attractiveness.

Another use of loss leaders is to allow sales people to discount the product heavily for specific situation, for example when the customer is spending more on other products.

Avoid using core products as loss leaders. The best loss-leaders are products where you are over-stocked and just need to shift them.

Example

A white-goods manufacturer brings out a very basic washing machine at a low price where no profit is made. They then encourage retailers to up-sell to a higher-priced machine with far more features.

A retail store chain advertises a range of big brand goods at low prices for their main sales. There are relatively few of these available, but the buzz it creates leads to many more sales in other, less heavily discounted products.

Discussion

It is easy to get loss-leader pricing wrong. One way this can happen is that when cutting the price too far, you create a rush but just for that product, resulting in a huge cumulative loss that is far more damaging than the attention gained. This is still a fine balance and a deep discount can create great publicity and additional sales.

Where loss-leader pricing goes particularly wrong is when the brand gets damaged, for example where discounted goods are of unexpectedly poor quality or where the value of the brand is decreased, such that customers consequently find other goods from the same brand to be unacceptably costly.

Using out of date models as loss leaders is a common strategy, though this needs to be done with care as customers may buy these in preference to the current models. Customers will compare loss-leader prices against those of similar competitor products and also with those in the same brand. The effect of this should be considered.

When loss-leaders are low quality, these make higher-priced, higher-quality items seem to be of greater value. Loss-leading can hence be deliberately used to enhance the perceived value of other goods. This must be done with care, of course, to avoid brand damage as above.

Allowing sales people to discount very heavily lets them use their discretion and make it 'special', hiding the fact that others may well be getting the same deal. When people feel they are getting exclusive offer, or that the sales person is desperate, they may be persuaded to buy when otherwise they may not.

See also

Customer Price Thinking, The Price-Quality Graph and the Fair-Value Line

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