A store may also turn a product they've overstocked into a loss leader, which has the added benefit of clearing out inventory. In short, if used with proper planning, it can be an effective marketing strategy..
Why price low?
Ashutosh Garg, Chairman and Managing Director, Guardian Lifecare, one of the India's leading chains of health, wellness and beauty stores, said, “The loss leader strategy works on a product or a combination of products that are offered at a discount to woo the customer. A lot of money is also spent on advertisement to lure the customer to the store.”
Who is not willing to buy a product at a discount rate? Loss leader strategy uses the common human psychology that while the customer is at the store he will buy more and spend more than what ‘hooked’ them in the store. This allows the retailer to compensate for the loss that he had made in the first place to attract the customer to the store.
Go ahead with a strategic planning
The strategy is different for different categories of retailer. A grocery retailer usually picks an item that is expensive in the market for the time being, like sugar, onion, vegetable oil or tomato and advertises the low price at which they are ready to sell it, usually at a loss or at cost price. These items are perishables and obviously can’t be stored for a long time either by the retailer or by the consumer. When the customer is lured inside the store, he ends up buying other goods as well which allows the retailer to compensate for the loss and make profit, because other items are at the MRP. Likewise, an apparel retailer uses this strategy before the change of seasons to free his stuck inventory usually at a good discount to the consumer, but the clothes that will be in demand in the season, like cottons in summer and woolens in winter are usually spared from the discount. This allows the retailer to free up his inventory and rotate cash.
“The promotional schemes used under this strategy operate on the logic of ‘Buy more to save more’ because it provides retailer with more revenue (though profits may go down). It also allows the retailer to bundle up the private label or store brand in an attractive offer based on the price positioning to attract the customer. The chances are the customer may not have bought the product alone but the bundling up in an offer makes it an attractive proposition for the customer and he may buy it, thus spending more, something that all retailers desperately want,” added Garg.
The risks involved
Beside all the benefits of loss leader strategy, one question arises, ‘Will the consumer be loyal to the store even after the loss leader campaign is over’? Providing examples on the same, Garg, said, “This is the most evident pit fall of the strategy because the consumer may become accustomed to paying less. The classic instance in this case is soaps being sold in a pack of three usually at a lower price than an individual piece.”
If done incorrectly, loss leaders can actually cause the business to lose money. Also, the problem comes when manufacturers and suppliers don't allow to sell their products on less price than the MRP or what their other dealers are selling the same item for. Moreover, in some situations, the retailer stocks the loss leader products anticipating the potential increase in the demand. This can be disastrous if the products don’t sell out (or get close to selling them all) especially if retailer intend to sell at a price that doesn’t even cover costs.
Like every other marketing strategy used in retail business, loss leader also has its negative and positive effects, but when applied in a right way, it is the most successful way to increase sales inside the store.