A loss leader is a product that is sold without making any profit and actually, it is sold at loss. A loss leader strategy is used to attract more customers and make them purchase more. The loss leader strategy is usually used by retailers that are new to the market. However, there are well-established retailers that still use this strategy to increase sales.
An example of a loss leader
One of the most well-known loss leader strategies was implemented by Ikea. Remember those extremely cheap hot dogs? No, they are not bad or expired, they are just a way to attract more customers. People came in, purchase extremely cheap hot dogs and decide to step into the store just to look at some products.
Another example is the one from Costco. Their rotisserie chicken is one of the most purchase products in the store. However, the price is really cheap and the store doesn’t intend to increase the price. The rotisserie chicken is their loss leader but it brings in a lot of customers and it is placed strategically in the middle of the store. That’s because people will end up adding other products to the cart before reaching the chicken.
Pros and cons of using the loss leader strategy
Just like any other strategy used in retail, the loss leader comes with advantages and disadvantages.
- Increase in sales
- Sell old or outdated stock
- Attract new customers
- Risk in making a loss
- Perception on quality
- Cherry Picking