You’re probably familiar with those crazy deals where stores sell products at low prices—sometimes even at a loss. Yes, it’s a powerful way to move inventory. This known statistic helps: 43% of global [Gen Z] shoppers want to take advantage of sales and deals.

Well, this strategy is known as loss leader pricing or loss leader strategy. Though it really is controversial, it’s an almost surefire way to drive traffic and sales volumes. In this post, we’ll dive deeper into this double-edged tactic and explore the pros and cons so you’ll know when it’s a smart move to use loss leadership pricing.

What is loss leader pricing?

Loss leader business model in an eCommerce store

Loss leader pricing is a strategy that when executed properly, can product higher profit margins. The basic premise is to sell certain products below cost on the off chance the customer will buy other stuff at a normal price or a much higher profit margin.

Take this from KPMG research: data shows that 36%of consumers buy promotional items more often. Though retailers widely use the tactic, it’s now utilized by the digital economy too. Some ways the online environment uses it is by:

  • free trials or basic versions (freemium) of SaaS
  • in-app purchases (for free-to-play mobile games)
  • discounted introductory pricing
  • premium content bundles
  • flash sales and limited-time offers

“The selling at a loss” marketing approach isn’t about making money on those specific loss-leader items. By sacrificing profits on a few products upfront, you’re supposed to make it up with all the extra add-on sales from customers. Strategically speaking, this business strategy is much like a calculated gamble.

When should you use loss leadership pricing?

Customers shopping online to increase sales of the eCommerce store

Your first thought might be “Why would I ever want to sell stuff at a loss?” Here are a few situations where it could make sense to you:

Attracting new customers 

Getting someone to try out your product or service for the first time is your biggest challenge? Sometimes, you just need a little push to get them over that initial hump. A discounted offering or free trial can be a powerful motivator for new customers to give the other items in your business a try—that can potentially convert and retain them into regular paying customers.

Introducing a new product line or service

When introducing a new offer, loss leadership pricing helps kickstart the adoption cycle. If you roll out a new line or service, you’re basically asking people to take a chance. So, offering them at an affordable price, (even at or below your cost temporarily) can reduce the friction and risk for early adopters to give it a shot. 

Promoting a big event

Want to create buzz for big events? We’re talking about special sales, promotions, or anniversary celebrations. Loss leader pricing can help get people amped. Just make sure you have a plan to convert those deal-seekers into bigger sales. Here’s a tip: position the loss leader discounts as extremely limited-time offers to draw customers and trigger scarcity and urgency motivation.

Holiday/Seasonal periods

This is not a random trick but a data-driven sales forecasting strategy. One of the most common times you’ll see loss leader pricing is around the holidays when there’s a ton of competition for consumer spending. Think Black Friday and Cyber Monday. Retailers to SaaS vendors will take losses on hot-ticket holiday items just to get crowds through the “door” by taking advantage of impulse purchases.

Moving stale products

Got some products that just aren’t selling? For any business, it’s inevitable. But rather than letting them get outdated, you could use a loss leader strategy to clear them out. Slashing prices on the slow-movers could stimulate sales but keep your fast-moving items at a higher profit margin.

Competitive advantage

By being willing to take a loss on certain “bait” products or services, you capture or gain market share by winning over your competition’s customer base with hard-to-resist deals. And honestly, in a highly competitive market, loss leader pricing can help you stand out. Couple the offer with good customer service and it’s also a way to show customers that you offer better value than your rivals.

Benefits and drawbacks of loss leader pricing strategy

Business owner weighing pros and cons of loss leader pricing strategies

While loss leader pricing can be a powerful tool for driving sales and profit margins and attracting additional customers, it’s not without downsides. Let’s take a closer look at the benefits and drawbacks of this strategy, so you can weigh your options.

Benefits

Loss leader pricing can offer some pretty sweet benefits like:

It gets people’s attention really quickly. 

Truth? People are bombarded with advertisements and promotions—DAILY. It’s estimated that in 2021, people see between 6,000 and 10,000 ads per day. Loss leader pricing can stop people in their tracks. After all, everyone loves killer deals. So promoting those discounted prices is an easy way to pique interest and curiosity.

It can convert deal hunters into real customers. 

Attracting customers to your website is only half the battle. Sure, they came for the initial bargain, but now you’ve got a captive target audience, to try and upsell to bigger purchases.

It reduces advertising and marketing costs.

Acquiring new customers requires spending money on advertising, promotions, and marketing. The average customer acquisition cost (CAC) in SaaS is $702 while $702 for e-commerce businesses. But crazy low prices become the promotion and advertisement themselves through word-of-mouth and deal sharing. 

It puts your brand on your target market or customer’s radar.

So while the upfront goal may be to drive traffic and sales through the low prices, an arguably equal benefit is you’re getting your brand noticed. Loss leaders can position your name in front of deal-savvy audiences who then spread that awareness rapidly through reviews, social sharing, and good old-fashioned word-of-mouth. 

You can position your brand as the place for unbeatable deals and savings.

If you think you have little differentiation on core value propositions, it’s tough to stand out. So, own the “unbeatable deals” advantage through loss leader pricing. That can become your signature.

Drawbacks

But you shouldn’t use the strategy recklessly because:

There’s no guarantee customers actually spend more.

At the end of the day, while you control the pricing, you can’t forcibly make customers spend more than they want to. There’s no certainty that those deal-seekers will stick around and purchase anything beyond just cherry-picking the loss leader’s discounted products themselves.

A risky play if you miscalculate demand.

Miscalculating demand when implementing loss leader pricing can be a costly mistake. If demand for the loss leader is too high, and customers aren’t buying enough of your other products, you could end up losing money overall.

It might piss off loyal customers who paid the full price. 

Yes, loss leader pricing can also backfire. Loyal customers who regularly pay full price might feel resentful if they see new customers getting the same product for a market cost or much less.

Devalues your brand’s premium positioning. 

Frequent discounts can diminish the perceived value of your brand. Customers might start associating you and small business owners with cheap deals rather than quality and value. And if you’re constantly discounting, you may look more desperate than smart.

You might train customers to always expect discounts.

Regularly offering deep discounts can condition customers to expect them all the time. This can make it difficult to sell products at full price in the future, leading to a dependency on discounts to drive sales.

Real-life examples of businesses using the pricing strategy 

Screenshot of Spotify as an example of loss leader strategy

Costco’s $4.99 rotisserie chicken

Costco’s $4.99 rotisserie chicken is an example of a loss leader pricing strategy. The low price of the rotisserie chicken is designed to attract customers to Costco stores. The chicken is typically placed at the back of the store, forcing customers to walk past other products and increasing the chances of them making additional purchases. Costco sells over 100 million rotisserie chickens annually, which helps to offset the losses from the low price.

Gaming consoles

Consoles, such as PlayStation and Xbox, are often used as loss leaders in the gaming industry. This means that they are sold at a price lower than their production cost to attract customers and drive sales of other higher-margin products, such as games and accessories. Consoles are often in high demand—especially when they are new. This demand drives sales and helps companies recoup their losses through other revenue streams like game sales, subscription services, and other digital content. 

Spotify’s free trials 

Many streaming services like Spotify (or Netflix) offer free trials to attract new customers and users. While they don’t make money during the trial period, they hope to hook users on their service so they’ll become paying subscribers. Today, it has 236 million paying subscribers—and we can assume that some started as free trial users.

Should you or should you not use loss leader pricing?

Loss leader pricing is a sweet deal for shoppers, but a double-edged sword for you. You can use it to lure customers in, yet it can also mess with your reputation. So, if you’re planning to adopt the pricing strategy, thoroughly understand its pros and cons first. And truth be told, loss leader pricing strategies isn’t for everyone.

Whatever pricing model you use, make sure to mitigate failed payments. Here at Recover Payments, we recognize the problem subscription-based businesses face with involuntary churn. And so we built a service that recovers failed payments and helps you retain customers. Book a free consultation to learn more about our service.