Loss leader pricing advantages and disadvantages for your store
Loss leaders are items sold in high volume at below cost price with the intention to attract customers into the store.
The pricing strategy is built on the thought that once a customer is inside, they will be stimulated to purchase other full price items, so they can make up the loss. Examples could be steeply discounted offers for milk, meat and bread, etc. as these have a wide customer appeal.
Convenience retailers often use a mix of loss leader pricing and standard pricing to make up the overall margins. In addition to driving footfall it can act as a competitive advantage against larger supermarket chains.
Loss leaders examples
- Discounted prices for turkey during the holiday season for a short period of time to create a sense of urgency. The loss from this item would then hopefully be offset by the additional ingredients required to make the meal.
- Raising the cost of hot dogs or burgers during the summer months and discounting the buns.
Loss leader pricing advantages and disadvantages
- Increase in sales – By increasing the footfall in your store loss leader pricing boosts overall sales, which then cover the loss from lower priced items.
- Sell old or outdated stock – Adopting this pricing strategy will have a dual purpose selling this stock and unlocking capital.
- Attract new customers – Window promotions displaying your discounted offers may entice new customers to come into your store and word of mouth about the low prices could also bring in local customers.
- Risk in making a loss – A big disadvantage of this pricing would be if the store does not attract new customers or stimulate sales of full-priced items. This will result in a reduced margin.
- Perception on quality- A customer’s perception of the quality of an item may be influenced by the price. If the price is too low, it may raise the concern of low quality, out-of-date, or damaged goods.
- Cherry Picking- Customer shopping behaviours could be formed if there is an expectation for discounted deals. This could lead to cherry picking, whereby customers solely purchase loss leaders and will shop in several places to find the items they need. As a result, there is a risk in negatively impacting the frequency of people visiting your store.
In today’s world, customers place great value on convenience. If your location is good and prices are low, but sales are decreasing, it’s important to consider what a customer’s experience is when visiting your store.
Lowering prices may drive foot traffic, but it’s their experience that has the biggest impact on whether they choose to come back to your store. These points should be considering before adopting this pricing technique in your store.
For tips on increasing sales in your store, please read '10 Retail Tips to Increase Sales in Your Store'.
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