Here's how you can implement the loss leader strategy for your e-commerce business.
- Offering loss leaders is an effective strategy to increase sales of other products in your store.
- Loss leaders should be used on products that will not lead to company losses.
- Loss leaders can be used as a source of information on customer preference for products. This information can then be used to determine how much of a product to manufacture.
What is loss leader pricing?
Loss leader pricing strategy refers to an aggressive strategy in which goods and services are priced below their market cost to stimulate sales of other profitable goods. The rationale behind this strategy is that a store is able to draw traffic from its competitors who will in turn buy other more profitable products. This strategy is common with new companies that want to increase their client base.
You're shopping at an aromatherapy store when you notice a ridiculously inexpensive oil diffuser, something you've wanted for months. You decide to get it because you love a good deal, but you realize you can't use a diffuser without essential oils – so you buy those too, but they are not discounted. Oh, and then there's this essential oil guide that tells you everything you need to know about using the oils. You want to understand what you're doing, right?
Before you know it, you've spent far more than you planned, and this likely wouldn't have happened if you hadn't felt so obliged to buy that low-priced diffuser in the first place. This is a pricing strategy called loss leaders, and that aromatherapy shop knew exactly what they were doing.
According to John Story, associate professor at Cameron School of Business, "loss leaders are products that are sold below cost in order to build traffic and hopefully increase sales of other items."
Loss leaders aren't limited to brick-and-mortar shops; they can be offered by online retailers, luring consumers to their site with affordable prices and retaining them with complementary items or targeted ads.
"The role of the loss leader has changed in online shopping because you can't prescribe a tortuous path through your online product catalog," said Story. "However, online loss leaders can be powerful tools and should not be abandoned just because sales have shifted online."
Here's how you can implement the loss leader strategy to your e-commerce business.
Use targeted ads
Online retailers have the upper hand when it comes to targeted ads. Even if a loss leader simply draws attention to your site, without consumers making a purchase, it is still allowing you to target that consumer in retargeting ad campaigns, according to Tim Trampedach, owner of e-commerce site Torqued.
If they do make the purchase, however, you'll have even more information to work with, like buying trends and shopping preferences.
"We know which customers are more likely to purchase multiple items when they visit our site, and these are the perfect targets for loss leader pricing," said Story. "With targeted advertising, we can be certain that loss leaders are offered to those customers who are most likely to respond favorably."
Every sale, no matter the amount, generates a customer record, added Trampedach. "This will allow for marketing to that customer for potential future sales."
Place discounted items in the right place
To attract more sales on more profitable items, place the discounted items next to high net-worth products. In most cases, the loss leader should be one that complements another, more profitable, product.
Avoid stockpiling the loss leader product
Have enough inventory for the loss leader product. Where possible, consider limiting the number of items a customer can purchase. Customers should only buy a limited amount of the loss leader product to allow other customers the opportunity to purchase the same product while buying other products. It shouldn't be the case that the only product being purchased at your store is the loss leader product.
Offsetting the loss
You might be hesitant to implement this marketing strategy because you risk losing revenue. However, there are many ways to offset this loss on a digital platform – often more so than in a brick-and-mortar store.
"In the online store, once the loss leader is in the shopping basket, we have the opportunity to offer complementary items, other sales items or promotions, such as free shipping with a minimum order," said Story. "In a traditional offline store, we didn't know a shopper was walking out with only the loss leader until they checked out and left. The data-rich online store provides more opportunities to offset the loss in loss leaders than we ever had with in-person shopping."
Matt Warren, CEO and founder of Veeqo, a shipping software brand, recommended offering a major sale on a few products to lure customers, then encouraging them to purchase other nondiscounted products. You can do this by creating a section under products or at checkout that says something along the lines of "frequently bought together" or "customers who bought this item also bought," as executed on Amazon.
Offer free shipping
Another attractive loss leader, according to Warren, is free shipping. Online retailers can offer this for any amount spent or only for over certain amounts spent (i.e., free shipping for purchases over $50).
"This can be a great way to compete with big retailers and markedly increase onsite conversions," he said. "As long as you still utilize tactics to get people to bulk up their cart and use a quality shipping software … to keep costs to a minimum, it can be a solid strategy."
Benefits of a good loss leader strategy
- It is easier to enter a new market. By selling products at a lower price, a business can thrive in a new market. Customers are often loyal to their stores; they will, however, buy from a new store if it's selling products at a lower price.
It can attract new customers. Goods news spread fast. Customers browsing your online store may inform other customers about the products you are offering at a cheap price. This will attract new customers who are likely to remain regular shoppers.
- You can promote other products. As customers buy the loss leader products, you can promote other, more profitable products. This can be through word-of-mouth or simply placing these products strategically close to the loss leader products in your online store.