Loss leaders are goods or services offered at significant discounts (sometimes below cost) in order to attract customers to a store and promote sales. It is a time-honored practice that has been met with much success, especially by large discount retailers. The intent of this pricing strategy is to not only have the customer buy the loss leader sale item but other products that are not discounted.
Inside retail, this has been called a "nail down." When I began my retail career 30 years ago, we used to put the loss leader or "nail down" product on the front page of the flyer. It was always a product at a ridiculously low price. The term nail down evolved from retailers literally nailing the product to the shelf so it could not be sold. The idea is a customer would come in and then the salesperson would "step" the customer to a higher-priced item.
Examples of Loss Leaders
There are a variety of different loss leaders that are commonly used. One example is when a store gives out free samples of an item, say cookies, as customers shop. The hope is that the customer will buy a package of the cookies along with other items before leaving the store.
Razor blades are another prevalent example of a loss leader. Most razors are sold inexpensively and are packaged with a few sample blades. But when it comes time to buy new blades, the prices are steep. But the customer has already bought the razor, the thinking goes, and will need to buy blades.
Printer ink is another good example of a loss leader; many home printers are sold with sample ink or toner cartridges included. The replacement cartridges are where you'll spend the big bucks (unless you want to go out and buy a whole new printer, which most people don't).
Other retailers like car dealers use this practice as well. They advertise an incredible price on a car or truck, but if you look closely it is just that one stock item. They even include the stock number in the ad. So when a customer arrives, they say "sorry we sold that truck, but we have these others for you to look at."
When to Use Loss Leader Pricing
If you have inventory that isn't moving or if you're overstocked on a particular item, making it a loss leader can move it. By cutting the price of such an item, you'll not only free up the shelf space and reduce inventory, but you'll also increase cash flow.
If you would like to be known for having low prices then the loss leader pricing strategy will help associate your business with that belief. Keep in mind that people want good quality merchandise for less money and not junk. Using loss leaders as a marketing tool can help gain new customers and increase return visits. People like a bargain and will likely come back to shop.
One out of the box way we used loss leaders in my shoe stores was through closeouts. I would buy closeouts from a vendor and then put them in the ad at 75% off. Since they were closeouts, I bought them at 50% off the wholesale price, so I was offering this amazing deal, but not losing money.
Loss Leader Precautions
There can be success in loss leader pricing, but be aware of some obstacles to the process. If done incorrectly, loss leaders can actually cause the business to lose money. Also, not all manufacturers and suppliers will allow their products to be priced under their minimum advertised price or less than what their other dealers are selling the same item. This is called MAP pricing.
It is also limited or forbidden to sell products below cost in some states. In recent years, lawsuits have emerged (not all successful) claiming some loss leader pricing strategies are the equivalent to illegal business practices.
If you decide to go this route, consider using loss leaders only when it's clear that the lost profit can be countered by the sales of other products or services. Avoid doing something illegal by following good pricing practices. Always make sure that there is a significant quantity of the sale item in stock and use the phrase "while supplies last" in any and all advertisements. Buying larger-than-normal quantities from suppliers may allow you a quantity discount, increasing the margin on the discounted price.
Last tip. Train your employees. In truth, you do not want to sell the loss leader. You want to sell a higher-priced item or an item with a better margin. But even if they do sell the loss leader, add-ons to the sales like accessories can offset the lost margin. Work on your employees' selling skills and practice with them what to do when the customer comes in for the loss leader in your store.