The loss leader strategy is a business concept that has been in use for years, and has been proven quite successful. Business owners can use this strategy to win customers back from a competitor, or to penetrate a new market. The idea is to price an item below market cost, at a loss, in order to draw customers in to the store to purchase this and other items. The profit margin on other items purchase should make up for the loss on the advertised item. There are some considerations to be taken into account so the loss leader strategy works as intended, and so business owners do not just end up losing money. Here is how to correctly use the loss leader strategy with or without the help of sales forecasting software.
What Is Loss Leader Pricing?
Loss leader pricing is a particularly aggressive pricing strategy. Loss leader pricing strategies include selling particular goods below cost to attract customers to make up for those losses buy purchasing additional profitable goods. This is a retail sales strategy, but a similar one is used in manufacturing, and is referred to as penetration pricing. Simply put, loss leader pricing is an effort to entice customer traffic away from competitors and into your store. If this sounds good to you, continue reading our tips below to make use of this sales strategy effectively.
Pick The Right Product To Discount
The loss leader strategy is most successful when it is applied to an item that customers purchase frequently, so it will be obvious there is a discount. It should also be an item that is usually purchased in conjunction with other products. If used with complementary products, customers are less likely to walk in and only purchase the discounted item. The most common example is razor blades; they sell at a premium price but the razor unit holding the blade is often a loss leader. Business owners should carefully think about what item to discount in order for the loss leader strategy to be successful.
Make Customers Aware Of Discounts
In order for the loss leader strategy to work, customers have to be aware of the sale price. You do not have to worry about conducting an in depth customer analysis. This can be achieved through advertising in the store or via standard marketing channels (e.g. tv, radio commercials, online ads or the weekly store flyer). A coupon is an excellent way to not only tell customers about a special discount price, but it allows a business owner to track how many people the sale reached. Undoubtedly, the loss leader strategy will only work if people know which item is on sale.
Put Discounted Items In The Right Place
This part of the loss leader strategy relates to the first suggestion here. To encourage customers to buy more than the discounted item, loss leaders are often placed in the back of high street stores so shoppers have to walk through areas with high priced, high profit items on the way. Stocking your loss leader at the front of the store could encourage shoppers to just grab the cheap item and not buy anything else, thereby defeating the purpose of implementing the loss leader strategy in the first place. Business owners should examine their sales floor plan to determine the best location to place items using the loss leader strategy.
Avoid Stockpiling The Loss Leader Product
Business owners would be wise to discourage stockpiling of discount items because it reduces visits to your business. They must use a proper ERP system in order to have enough inventory on hand. With the loss leader strategy in mind, consider a perishable item for the sale so limited quantities are desirable to the customer. Most stores also impose a purchase limit on loss leaders for the same reason. There is no point in the business owner utilizing the loss leader strategy if customers do not frequently come back or buy other products.
Use It To Clear Out Old Merchandise
If an ecommerce business owner finds they over ordered at item or a product is not selling as quickly as expected, applying the loss leader strategy may be a way to clear out old merchandise. The benefits are two-fold; the business owner can reduce overstock to make way for new items, and the loss leader strategy encourages customers to buy more products while shopping.
Create Loss Leader Upsell Products
A loss leader product works very well when you can upsell the customer. For example, someone comes into a store for cheap coffee prices. Then, they buy a meal or snack to go along with it. Any products that have good upsell or complementary products can sustain a loss leader strategy. Additionally, you can offer a below cost product with the option to upgrade to another product of increased value at profit. This attracts customers and gives them more options to deliver better value at a profit for the seller.
The loss leader strategy is highly effective and employed by many businesses, particularly grocery stores, fast food chains and retailers. It is a good way to break into new markets, win back customers from competitors or establish a business reputation for good prices. However, business owners should be cautious in how the loss leader strategy is implemented to ensure it does not backfire. The tips detailed above will a teach a business owner how to implement a loss leader strategy that works and keeps customers coming back for more.
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