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.

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.

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. Porter's 5 Forces

    Named after Michael E. Porter, this model identifies and analyzes ...
  4. Strategic Alliance

    An arrangement between two companies that have decided to share ...
  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. Retirement

    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 income statement. From there, various expenses are deducted such ...
  6. Professionals

    Understanding Interpersonal Skills

    Interpersonal skills are the social skills people use to interact effectively with other people. A lack of good interpersonal skills may lead to unsuccessful personal relationships, as well as ...
  7. Professionals

    Who Counts as an Entrepreneur?

    An entrepreneur is a person who starts a new business or organization, taking some personal financial risk to do so. He or she may quit a secure job to devote time to starting the new business, ...
  8. Investing

    Understanding Turnover

    Turnover has a number of different, but related, meanings depending on the context in which it is used. Generally, it means the number of times an item is replaced with a new or similar version ...
  9. Investing

    What are Operating Expenses?

    An operating expense is any expenditure made for the purpose of operating a business. These expenses are the day-to-day costs that help keep the business going. Operating expenses are reflected ...
  10. Investing

    What's Overhead?

    Overhead is an accounting term used for expenses that have to be paid even if the business doesn’t earn any revenue. The business would not be able to operate without paying its overhead expenses, ...

You May Also Like

Hot Definitions
  1. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  2. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  3. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  4. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  5. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  6. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
Trading Center