Loss Leader Pricing Meaning
Loss is the word which can remove the smile from majority of the faces because nobody in this world likes to be on the losing side but in case of marketing many companies or store use a strategy called loss leader pricing. Loss leader pricing refers to that strategy using which company or store sells products at lower than production or wholesale price in order to attract consumers in the hope that consumers will buy other products as well leading to overall increase in sales of the company or store. This strategy is typically used by supermarkets to lure customers to visit the store and do more shopping. In order to understand more about this topic one should read the advantages and disadvantages of loss order pricing –
Advantages of Loss Leader Pricing
Increase in Total Sales
The biggest advantage of loss order pricing is that it helps in increasing the total sales of the as when customers visit the store so as to purchase the product which is available at lower than wholesale price than they will see other shelf products as well and some of the will buy the products. In simple words by increasing the footfalls in the store loss leader pricing ensures that store makes higher sales which in turn will cover the loss incurred by the store due to selling some products at lower than wholesale price.
Attracts new Customers
Another benefit of this strategy is that superstore is able to attract new customers because the moment people hear that particular store is offering a product at significant discount to market price than customers from far off places will also come resulting in increased footfalls into the store which in turn will compensate the loss which the store has made from lowering the price of products.
Selling Old and Outdated Stocks
All stocks of the store do not get sold which results in store accumulating old and outdated stocks and when the company adopts loss leader pricing on those stocks than it gives the dual benefit that are increased sales as well as unlocking of working capital by selling old and outdated stocks.
Disadvantages of Loss Leader Pricing
Loss-making Decision
The biggest disadvantage of loss order pricing is that if store is unable to attract new customers and its sales does not increase than it will result in loss for the store as reduction in price of products will shrink the margins of the store and could prove to be a fatal decision especially during those times when economy is not growing.
Unsatisfied Customers
Another problem with this strategy is that sometimes loss leader products get sold so quickly that majority of customers do not find the product at the advertised price resulting in dissatisfied customers and chances are those customers will not purchase anything as they feel that store is doing it deliberately. Hence in simple words, if the store does not have enough number of units so as to satisfy majority of customers than it should not go for this strategy.
Smart Buyers
Another problem is that in this age of technology people have become smart and they will only buy loss leader product and as far as other products are concerned they will search for cheaper alternative and may go out of store buying only loss leader product from the store. Hence the whole premise that more customers mean more sales of other products will fail and store will incur a loss.
As one can see from the pros and cons of loss leader pricing that any company or store thinking of adopting this strategy should carefully read above points and then decide whether it wants to adopt this strategy or not.