Pricing strategy: Selling products at a loss to increase sales of other profitable products
Introducing Loss Leader Pricing
Loss Leader pricing an effective marketing tactic that involves offering products at prices lower than what it takes to produce them. Companies often rely on this approach when they are expanding their customer base or striving for higher market share. Loss leader pricing is a great way to draw in new customers and encourage sales of additional items
The price anomaly is rooted in consumer behavior assumptions; namely, that shoppers seeking out deals can be tempted to visit stores where they will purchase higher-priced products like food or beverages. It follows the logic that if these shoppers are already “in the store” (even if just for their online comparison shopping), then it may as well make sense for them to pick up some extra items while there.
To price an item under cost, the production price must be lower than its market value while concurrently not alienating demand. This requires (A) a thorough knowledge of costs to accurately determine pricing and (B) plentiful demand for this particular product in order to guarantee that total revenue covers both recovering costs and additional profits from complementary items. Commonly used loss leader products include food, cars, household appliances, clothes, digital downloads alcohol or tobacco.