Loss Leader Strategy
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.
Investopedia explains '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.