What is a Loss Leader?

Loss leader is a strategy used in marketing. It is the practice of selling one product at a loss in profits in order to make greater profits from related purchases. If a new market offers deep discounts to attract customers when they first open, they are employing a loss leader business strategy. Other strategies include selling printers for cheap and making ink cartridges expensive or cutting the price on razor handles that require an expensive replacement cartridge. Using the loss leader strategy, a business takes a temporary loss to encourage development of a customer base that will make repeated purchases at a greater eventual profit.

Loss leader marketing gets attention from consumers and can often yield beneficial results. Offering a competitive price promotes spread of a company through word of mouth and promotes knowledge of the company brand. Selling a product or service at a noticeably low price brings in customers from outside the existing market for the product or service, which can encourage return purchases from happy converted customers.

On the other hand, this type of marketing requires that the company has backup capital savings to help them weather the temporary loss. Underfunded businesses are poor candidates for success using loss leader marketing. Offering a product at too low a price can attract opportunistic customers who do not intend to make repeat purchases. When the product or service is eventually raised to a profitable price, predicting whether customers will continue to buy after the discount disappears can prove to be difficult.

Marketing strategies that focus on using the product price to make a profit are called pricing strategies. Other pricing strategies include value-based pricing, psychological pricing and skim pricing. Whether a marketing strategy will work depends on the product demand, the buying market and the timing of the product delivery.

Loss leader marketing is a similar strategy to freebie marketing, in which the business gives a free product away in order to promote the sale of profitable accessories to that product. Both types of marketing strategies are used in sales promotions and are designed to sell a high-profit accessory product by luring the customer into the market with a low- or no-cost entry product. Freebie marketing was most famously practiced as early as 1910 by King Camp Gillette, the inventor of the disposable razor. Gillette decided to give the razor handles away to introduce people to the budding product and promote sale of the disposable razor blades as an accessory.