What is a 'Loss Leader Strategy'

A loss leader is a product or service at a price that is not profitable but is sold or offered in order to attract new customers or to sell additional products and services to those customers. This is a common practice when a business first enters a market. Essentially, 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 can be 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 have to buy their replacement blades, which is where the company makes its profit.

Loss Leaders and Video Game Consoles

Another example is Microsoft's Xbox One video game console, which was sold at a very thin margin per unit to create more potential to profit from the sale of higher-margin video games and subscriptions to the company's Xbox Live service. In fact, the loss leader strategy is common throughout the video game industry, and in most cases, consoles are sold for less than the cost of building them. Traditionally, this loss doesn't even take into account design costs, a testament to how much the industry believes in this strategy. In some cases, when manufacturers use the loss leader strategy, it takes the name penetration pricing, as the manufacturer is trying to penetrate the market.

Loss Leaders and Retail Shops

Both brick-and-mortar stores and online shops use loss leader pricing. These businesses frequently price a few items so low that there is no profit margin. The hope is that once the shopper is in the store or on the website buying the advertised loss leader, he stays and buys more. Unfortunately, for business owners, consumers sometimes leave without buying anything else. The practice of jumping from shop to shop picking up loss leader items is called "cherry picking."

Loss Leaders and Introductory Pricing

Introductory pricing can also be a loss leader. For example, a credit card company may offer a very low introductory rate to entice clients to open a card or transfer their existing balances. Then, after snagging the client, the company eventually raises its interest rates. Similarly, cable companies often offer low rates, sometimes at a loss, for an initial period to attract new customers or to lure customers away from competitors.

Disadvantages of the Loss Leader Strategy

For businesses who use the loss leader strategy, the biggest risk is that clients may only take advantage of the loss leader pricing and not use any of the business's other products and services. Additionally, some small-business owners complain that they cannot compete with large corporations who are able to absorb the losses implicit in this strategy. Finally, suppliers may also experience issues with the loss leader strategy, particularly if a business begins to put pressure on the supplier to drop prices so that the business can continue to offer loss leader pricing.

RELATED TERMS
  1. Price Leadership

    When a firm that is the leader in its sector determines the price ...
  2. Competitive Pricing

    Setting the price of a product or service based on what the competition ...
  3. Market Leader

    A company that has the largest market share in an industry, and ...
  4. Penetration Pricing

    A marketing strategy used by firms to attract customers to a ...
  5. Market Challenger

    A firm that has a market share below that of the market leader, ...
  6. Customer

    An individual or business that purchases the goods or services ...
Related Articles
  1. Managing Wealth

    How To Improve Your Leadership Skills

    Few people are born leaders. Most need to learn the required skills, and then practice them throughout their lives.
  2. Personal Finance

    How To Improve Your Leadership Skills

    Being a leader can help you in your career. Here are some tips for improving your leadership skills.
  3. Small Business

    6 Famous Words of Advice From Business Leaders

    Here are some words of motivation from leaders who measured their success by more than the (substantial) money they made.
  4. Small Business

    What's Involved in Customer Service?

    Customer service is the part of a business tasked with enhancing customer satisfaction.
  5. Managing Wealth

    The Top 10 Best TED Talks for Business Leaders

    Influential talks for 21st century managers chosen from TED, a nonprofit dedicated to spreading ideas worth sharing.
  6. Managing Wealth

    How To Profit During High Inflation

    Some companies are better than others at pivoting their strategies to overcome inflation or other cost-increasing concerns. The best companies can push cost increases out to the market quickly ...
  7. Taxes

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  8. Small Business

    Is Gillette's Market Edge Becoming Razor-Thin?

    Despite Gillette's success with the razor-and-blades strategy, the increasing popularity of beards and new competition may slow the brand's growth.
  9. Small Business

    How Penetration Pricing Works

    Penetration pricing unveils a new product or service at an initially low price to attract customers away from competitors.
  10. Financial Advisor

    Top Tips for Deducting Stock Losses

    Investors who know the rules can turn their losing picks into tax savings. Here's how to deduct your stock losses.
RELATED FAQS
  1. Is good customer service something to look for in a company in which I am considering ...

    Learn about the importance of customer service when deciding whether to invest in a stock. Good customer service can ensure ... Read Answer >>
  2. What factors make it difficult to compare performance ratios between retail stocks?

    Learn which factors make it difficult to compare performance ratios among retailers due to differences in pricing strategies, ... Read Answer >>
  3. How does a customer base dictate goodwill?

    Find out how a customer base dictates the value of the goodwill by providing a ready market for its products and spreading ... Read Answer >>
  4. What is the difference between cost and price?

    Consider how cost affects a product's price. Corporate expenses and the current cost of living both impact the final sticker ... Read Answer >>
  5. How can small businesses manufacture demand?

    Create demand for a small business product or service by focusing on the brand and market. Continue to learn offer excellent ... Read Answer >>
  6. What strategies do companies use to regain market share they have lost?

    Learn about the three simplest ways companies can regain lost market share: pricing changes, promotional changes and product ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center