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Marketing 360® Blog

Loss Leader Pricing – This is How to Develop An Offer That Pays In the Long Run

Post By Scott Yoder | eCommerce Marketing

Have you ever wondered why milk is always in the back of the grocery store?

Do you think grocery stores make significant profits from milk?

The answers to both those questions connect to the tactic of the loss leader, which is a product or service offered at a below profit price to attract new or repeat customers.  The strategy is to sell additional products and services later so you ultimately profit from the customer.

Historically, groceries stores sold milk at a loss so they could get shoppers into the store (when the milk ran out).  They put it in the back so that as people make their way through the store they pick up other items.  It’s on the sale of those incidental items that the store profits.

The loss leader marketing strategy is tried and true.  It’s why bars have happy hours.  It’s the origin of the “freebie”.  Without loss leaders, you wouldn’t know the phrases “limited-time introductory offer” or “buy one, get one free”.

And while this is a classic strategy, it may be more important than ever in the digital age.  Today, with so much competition, it’s harder than ever to stand out.  You need a strong value proposition, but you also may need a loss leader to motivate buyers initially.

Is Using a Loss Leader Right for My Business?

This is an important question to ask because the loss leader doesn’t work for every business.

The biggest considerations are:

  1. Your ability to upsell and resell customers high-profit items.
  2. The lifetime value of your customers.
  3. The ability to absorb “cherry pickers” who only buy at a discount.
  4. The degree to which your strategy is to build a discount pricing brand.

In other words, if you take the loss, you need to be able to regain a profitable “lead” in the future.

You also need to consider the brand implications.  There are risks in training customers to expect a discount.  If that becomes part of how you operate, you may have to evaluate your profit margins and sales volume.  To be viable, a “discount” operation needs to sell at a higher volume.

But the loss leader strategy can work well outside the discount arrangement when you use it to motivate people initially.  Often, this takes the shape of a freebie that is used to lure people into an introduction.  It gets their foot in your door.

From there, however, you have the job of selling them on the value of your ongoing services.  For example, this child care service offers a month of free tuition:  child care case study call to action

The idea, of course, is that they’ll win a new student for years, but that means that their services have to be valuable enough that parents want to keep their kids there.

Services like gyms, yoga classes, and chiropractors use loss leaders to get people started on a path of recurring services.  For example, this chiropractor offers not just a free consultation, but a 15-minute massage.    chiropractic case study

This is very effective for lead-generation, but it’s essential that they provide a positive experience that leads to the patient scheduling further appointments at full prices.

New restaurants frequently use loss leaders to motivate new diners to come in.  They take a loss or wash on the first few visits, realizing that if they can get them in three times, the chances of them becoming a regular goes way up.  This type of ad is very effective:

facebook restaurant ad

eCommerce Loss Leader Strategy

For eCommerce websites, the loss leader strategy is more like a retail store; you offer cheap milk, then upsell other items.

The strategy with an eCommerce website is to attract shoppers to your website with an irresistible offer.  There is value here because you gain brand exposure and you can add them to your retargeting or email marketing campaigns (even if they don’t make the initial purchase).

For an eCommerce site, the loss leader gets the shopper to engage in a transaction.  This is a really important step.  Once they buy from you and see you deliver a quality product, they’ll trust your brand to make future purchases.

If you are in a competitive market, you may have to run loss leader campaigns on select items to get initial market share, particularly on platforms like Google Shopping where price comparisons are easy.

Another excellent way to employ this strategy is to offer a low-cost sample item that generates the first sale.  For example, Marketing 360® client Venus et Fleur sells large arrangements of preserved flowers which cost hundreds of dollars.  However, they also offer a mini round (a single rose) for just $39:

loss leader ecommerce example

Now, this is not technically a loss leader.  They make a small profit by selling this product.

However, their eCommerce business will never be viable if the majority of their sales are the mini arrangement.  The purpose of this product is to let people see what the flowers are like without having to commit to spending a lot.  When they discover they love these roses, then they’ll be more likely to spend on larger arrangements.

Content Marketing as a Loss Leader

With digital marketing, the most common loss leader is a type of freebie.

That freebie is informational and/or entertaining content.  This is also called content marketing, and it is probably the most common loss leader strategy used online.

Simply put, you provide information for free that helps people with their buying decision.  This needs to be quality content that you invest time and resources into so people will find value in it and share it online.

Perhaps the most prevalent example of this type of marketing is Red Bull.  They promote an endless array of extreme sports events, giving them what amounts to their own entertainment channel.

red bull likes facebookThey invest millions every year on these events, yet you can access all this content for free on their website and social media channels.  The tradeoff?  They have one of the world’s most recognizable brands.

Smaller businesses can use videos and blog posts to rank for informational searches and generate leads.  You provide the content for free, but the payoff is exposure for your brand.

Read a case study on small business informational marketing. 

Wrap Up

The loss leader is like bait.  It tempts buyers with an irresistible offer.  It lowers risk by letting them try the product or service before making a commitment.  It provides valuable information or entices with entertaining content.

At this point, don’t expect to be able to sell information.  It’s the internet’s built-in loss leader.  If your leads often have information gaps, provide high-quality info for free, then use it to build trust for your brand and move leads through your sales funnel.

If you need to offer cheap milk to compete, do so strategically.  Make sure you have a solid plan for getting people to buy profitable products and become repeat shoppers.

Be sure to calculate the lifetime value of a customer.  In some cases where recurring services happen over a long-term relationship, even a considerable initial loss can pay off.

And be aware that there will be some cherry pickers.  Account for this in how you budget campaigns and make sure that’s not the only type of lead you’re attracting.

Today’s digital consumers respond to initial value offered at little to no risk.  The tried and true loss leader strategy continues to enjoy success because it fits that need.  Sometimes you’ve gotta take an early loss to win in the long run.