Loss Leader Strategy

AAA

DEFINITION of 'Loss Leader Strategy'

A business strategy in which a business offers a product or service at a price that is not profitable for the sake of offering another product/service at a greater profit or to attract new customers. This is a common practice when a business first enters a market; a loss leader introduces new customers to a service or product in the hope of building a customer base and securing future recurring revenue.

BREAKING DOWN 'Loss Leader Strategy'

The loss leader strategy is more than just a nifty business trick - it is a successful strategy if executed properly.

A classic example is that of razor blades. Companies like Gillette essentially give their razor units away for free, knowing that customers will have to buy their replacement blades, which is where the company makes all of its profit.

Another example is Microsoft's Xbox video game system, which was sold at a loss of more than $100 per unit to create more potential to profit from the sale of higher-margin video games.

RELATED TERMS
  1. BCG Growth Share Matrix

    A planning tool that uses graphical representations of a company’s ...
  2. Throughput

    In business, the rate at which an organization reaches a given ...
  3. Strategic Alliance

    An arrangement between two companies that have decided to share ...
  4. Porter's 5 Forces

    Named after Michael E. Porter, this model identifies and analyzes ...
  5. Acquisition Cost

    1. The cost that a company recognizes on its books for property ...
  6. Channel Stuffing

    A deceptive business practice used by a company to inflate its ...
Related Articles
  1. Personal Finance

    Hidden Costs Of Product Rebates

    These cash incentives lure in consumers, who are often unable to collect on the deal.
  2. Investing

    Power Up Your Portfolio With Video Game Stocks

    Level up your winnings by investing in this fast-paced, highly skilled industry.
  3. Markets

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  4. Markets

    Great Company Or Growing Industry?

    Look at the big picture when choosing a company - what you see may really be a stage in its industry's growth.
  5. Economics

    Understanding Switching Costs

    Consumers incur switching costs when they receive a monetary or other type of penalty for changing a supplier, brand or product.
  6. Investing Basics

    What's a Price-Taker?

    Price-taker is an economic term describing a market participant who has no effect on overall market activity.
  7. Economics

    Explaining Replacement Cost

    The replacement cost is the cost you’d have to pay to replace an asset with a similar asset at the present time and value.
  8. Term

    What are Articles of Association?

    Articles of association are a document that specifies the regulations for a company’s operations.
  9. Investing Basics

    What Does Window Dressing Mean?

    Window dressing is the actions taken close to the end of a reporting period by managers to try and make their financial numbers look better.
  10. Economics

    What Does Business-to-Business Mean?

    The term business-to-business refers to transactions or communication that takes place between two or more businesses.
RELATED FAQS
  1. How rapidly can expanding sales reduce a firm's earnings?

    In order to operate and make money, a company must spend money. Revenue - the dollar amount of sales - can be seen on a company's ... Read Full Answer >>
  2. How can I calculate funds from operation in Excel?

    In general, the terms "work in progress" and "work in process" are used interchangeably to refer to products midway through ... Read Full Answer >>
  3. When does Q4 start and finish?

    Most companies such as Facebook have financial years that end on December 31st. For these companies, the fourth quarter begins ... Read Full Answer >>
  4. When is it useful to look at a company's fixed asset turnover ratio?

    It is useful to look at a company's fixed asset turnover ratio when an outside observer, such as an investor, wants to know ... Read Full Answer >>
  5. What is the difference between perfect and imperfect competition?

    Perfect competition is a microeconomics concept that describes a market structure controlled entirely by market forces. In ... Read Full Answer >>
  6. How difficult is it to understand business analytics?

    In the abstract, business analytics is the study of financial, economic, consumer and production data through statistical ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  2. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  3. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  4. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  5. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
  6. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!