​Loss Leaders' Effectiveness: A Look at the Strategy's Pros and Cons

Promoting a loss leader is a common strategy among entrepreneurs. A loss leader is defined as any product or service offered at a significantly reduced price with the goal of bringing in more customers. Entrepreneurs use this strategy to lure potential customers in purchasing other products offered at a more profitable price.

A loss leader can be offered in bundled deals with other related items or sold as a standalone product. Both strategies aim to attract more customers and retain longer business relationships with them. The question, is, whether this strategy is beneficial or not for entrepreneurs. Answering this question requires identifying loss leaders' pros and cons.

Advantages

Utilizing loss leaders may seem like a bad idea. Promoting an item at a cheap price may seem to be a loss for entrepreneurs. However, it has its advantages that make it a popular strategy for years.

Brings in More Customers

Loss leaders attract customers as the latter prioritize savings. Anything obtained for free or for a minimal amount is considered a good deal. Customers interpret that getting a loss leader with another package, whether they need it or not, is budget-friendlier than getting them separately in the future. Buyers will consider shopping from a seller that offers regular loss leaders in their shops.

Aside from the savings, convenient shopping is another reason why loss leaders are popular among customers. They know that even if an item is currently not needed, they will definitely use it in the future. Obtaining them with a good deal offered earlier will keep them from rush shopping in case they already need the item. Many loss leaders are non-perishable goods, which means customers won’t worry about long-term storage.

Lures Former Customers Back

Loss leaders can attract former customers back. Generally, an individual may have been patronizing another seller, but he will definitely return upon hearing about new offers. Once former customers have returned, the business will experience the next benefit.

Boosts Customers’ Loyalty

Entrepreneurs aim for better customer retention to keep the money flowing in the business. Loss leaders can improve customer loyalty with the savings they offer. If customers notice continuous sales with loss leaders, they will have high chances of shopping again to the same store for the purpose of saving money.

Cleans Inventory

Some sellers offer loss leaders as a clearance sale strategy. Companies test different products to see which sell. Unfortunately, not everything sells and causing a huge loss by remaining on shelf. Sellers then include them in a different package as loss leaders and to clean their inventories.

You may ask why these items are offered as loss leaders rather than being sold as clearance items. These are probably the items that won’t sell on their own. Sellers then include them in related items as bundled packages to get noticed by customers. Once loss leaders have been sold out, sellers will have enough inventory space for getting new items.

Improves Company Image

Using loss leaders goes beyond profitability, as it can also improve a shop’s image by offering affordable items that help people save money. Customers give high regards to sellers who are putting mass consumers at mind firs by offering budget-friendly products. They will continue patronizing and boost company’s integrity.

Puts Competitors at a Disadvantage

Customer attraction using loss leaders works in two ways: it attracts more customers to an investment and then putting competitors as a disadvantage as they lose clients. Improved profit for a business means a loss for other companies. Knowing that competitors are already disadvantaged, an entrepreneur can maximize the chance and conduct other strategies that may be helpful for a business.

Disadvantages

A loss leader may be effective in driving sales, but it also has its disadvantages.

Insufficient Profit

Loss leaders may earn profit, but it's not as much compared to selling items at regular prices. Loss leaders' low prices mean lower profit margin, which may be insufficient in contributing to a company's finances. Continuing with loss leaders without proper implementation may result to significant loss instead of boosted profit.

Customers Know Better

Not everyone buys the concept of loss leaders. Customers may buy items from sellers with loss leaders, but it doesn't mean they will become avid customers. They are after savings, which means they will patronize any store that gives them what they need.

Moreover, not everyone considers loss leaders as savings. They are generally the more practical groups of consumers who have analyzed that the offer is a mere facade to attract more clients, not necessarily a way to help them with their needed savings.

Lack of Loss Leaders Stock

Customers may be lured by loss leaders, which means boosted demands for the product. The problem is once supplies don't last, then the store won't have anything to offer the new customers who are hoping to take advantage of the offer. They will get disappointed from the offer and may not return to the shop as entrepreneurs expect.

Selling Products that Don't Appeal to the Market

Introducing loss leaders may be simple, but the problem lies in finding the best products to sell. The product should be appealing to a general market to drive consumers. Selling the wrong products will defeat the purpose of selling items at extremely cheap prices and the campaign will fail.

Overall, loss leaders may be a common strategy among entrepreneurs. It may have its advantages, but wrong implementation and lack of market study will render this strategy useless, resulting to losses that may cause a lot of issues for a company. Using loss leaders effectively requires a good amount of planning and other marketing techniques that will attract customers properly.