Have you ever been intrigued by the “6 items for 2$” type of deals when you go to your favorite fast food? Or when you’re shopping online and come across a “Free just pay shipping” offer? Now you’re wondering… are these promotions actually profitable to the company somehow or are you being scammed? Well, ELR12 has the answer. Let us introduce you to Loss Leader Strategy!
What is a loss leader?
The term ‘loss leader’ was originally used in 18th century US trade. It refers to trading goods which are sold cheaply to entice customers into buying other products from the store.
In a loss leader strategy, the company will sell their product at a discounted price to lure customers into coming into the store. The company then makes up for the loss of profits by selling more products that they normally would not sell.
In other words, the company loses money on the sale of these products. But it hopes to recoup this loss by gaining market share and increasing its profits from other products or services.
A loss lead strategy can be implemented in different ways like offering:
- Discounts on certain products at specific times of the year (Black Friday, Valentine’s Day etc.)
- Free shipping for purchases over a certain amount.
- Special promotions for customers who sign up for email lists.
What are the benefits of implementing a loss leader strategy?
Loss leaders have been around for decades but have only recently become popular. They allow for companies to grow without having to spend large amounts of money. There are many benefits to selling at a loss:
- Helps identify potential new customers who may be interested in purchasing the higher priced goods or services.
- Offers the possibility to test new products and market them without having to invest in expensive advertising campaigns.
- Generates leads for other products or services that may be sold at higher prices.
- Provides an opportunity for companies to differentiate themselves from their competitors.
- Increases customer loyalty by offering them discounts on their favorite products.
- Raises brand awareness and creates buzz around your company.
- Allows the company to sell their products at a lower price and collect some profits while they continue to develop their brand and increase in value.
- Helps avoid the risk of over-investing in inventory that may not sell, which could result in significant losses; or in some cases it might help them to get rid of excess inventory.
- It’s an easy way to grow your business without having to invest in expensive advertising campaigns or marketing campaigns.
A loss leader strategy can be used to increase profits, but also as a marketing tactic. It is not always necessary to offer the lowest price, but it is important that you offer the best value for money.
How to plan and execute a successful loss leader strategy?
Loss Leaders are popular with both retailers and service providers. The strategy can be used for any type of business, from physical retail stores to digital marketplaces and e-commerce websites.
It’s important for businesses of all sizes to have a loss leader strategy. Why? Because it helps them get more people in the door, increase their brand awareness, and provides a more competitive edge which will help keep their doors open.
The planning and execution of a successful loss leader strategy is not easy. It is important to consider the following factors:
- The product or service that you are going to sell below cost.
- The customer segment that you want to attract with the low-cost offer.
- How much you plan to discount the product or service below cost.
- How long you want to run the promotion before it ends.
- What your profit margins are for each unit sold, and how many units you need to sell in order for your business model to be profitable.
- Your brand’s reputation and value in the market place.
A loss leader strategy should be used with care and attention as it can be very risky. And depending on how well it’s executed, it can lead to significant financial losses for the company.
A lesson from Burger King
Burger King is a fast food restaurant that has been around since 1954. It has been around for a long time, so it is no surprise that they have tried many different strategies to increase their profit. One of the most recent strategies is to create a loss leader menu item that can be sold at a discount and then make it profitable through increased sales of other items on the menu.
The nuggets menu loss leader was introduced in March 2018 and was created by Burger King’s chief marketing officer, Fernando Machado. The strategy started with the introduction of three new items on the menu – chicken nuggets, fish filet, and fish tacos. These are all priced at $1 each in order to draw customers in for the main event – burgers for $4 each.
Burger King’s nuggets menu is a loss leader to attract customers. It is not profitable, but it brings in new customers who are willing to spend more money on the main menu items.
The strategy seems to be working as Burger King’s sales increased by 20% in the second quarter of 2018.