Here’s a piece of advice if you want to increase your in-store traffic: invest in a loss leader. In fact, you don’t have to stop at one. Depending on your size and budget, you could stock more. Of course, it also depends on if you approach this correctly. Because doing so won’t only give you a boost in traffic. It can increase your sales too.
What is a loss leader pricing strategy?
If you’ve read between the lines, you’ll note that above, we referred to a loss leader in the context of it being a product that you would stock - and it is. But, it is primarily a pricing strategy that you would apply to chosen products.
Here’s a more thorough explanation: a loss leader is a pricing strategy in which you would sell selected goods below cost price to attract customers. That’s because according to the loss leader philosophy, by running certain lines below market price, it’s expected that more customers will buy additional items while in your store, thereby making up for any loss you’ve accrued.
Of course, that doesn’t mean this pricing strategy always works. There are situations where it fails, and we’ll touch on why that happens in more detail in a section below. For now, it’s worth pointing out that it’s not always your fault. Besides other reasons, cherry-picking customers can play a role.
That said, when talk turns to this pricing strategy, it also invariably includes a discussion around another approach: predatory pricing. That’s because if you gloss over both, you may consider that each is interchangeable. In reality, while the two may share similar goals - dropping prices to increase your sales; there are distinct differences.
For one, a loss leader pricing strategy has the objective of stimulating sales of other more profitable goods. Meanwhile, your predatory pricing strategy is often used to keep your competitors out or prevent them from entering your market altogether - the intent is therefore different.
There is also the fact that predatory pricing is illegal (or there are at least legal restrictions in a handful of markets) as it involves pricing products below marginal cost for an extended period to the point that your competition can’t survive.
In that sense, the differences between the two strategies could not be more apparent. While one is worth investing in; the other is the definition of anti-competitive behaviour.
Is it worth investing in a loss leader pricing strategy?
Answering the question of whether it’s worth investing in a loss leader pricing strategy depends on how you approach it and to whom you are talking. For example, it’s not always a good idea to invest in it - more on that in below sections.
Besides that, though, the easiest (and ultimately best) way to know if it’s worth your time is by weighing up the advantages against the disadvantages.
Embrace the advantages ...
There are obvious benefits to adopting this pricing strategy across your stores. As you’ll note, many of the advantages listed below act as causal sequences - one follows the other or is interdependent to another.
The first and most apparent boon is that it brings more feet into your store. This increased traffic can consist of either your current customers who shop your store more regularly than in the past, new customers, or both. That’s because of shopper psychology. The moment shoppers hear that you’re offering a product at a significant discount to the market price, they’ll want to visit to find out more.
They are also likely to tell their friends and family, which means even more traffic for your store.
The direct result of increasing your store’s footfall is you have every opportunity to boost your total sales. That’s down to the simple law of cause and effect. More people will lead to more sales, which allows you to cover any losses you’ve incurred and, in turn, means you can continue employing this strategy.
Another direct result of implementing this strategy is that you'll have happier customers. The more satisfied the customer, the more loyal they are. The more loyal they are, the more often they will return.
… But be cautious about the disadvantages
As much as there are many advantages to using this pricing strategy in-store, you do need to be mindful of the disadvantages.
One such problem is if you’re unable to attract new customers to your store. Maybe the discount isn’t as attractive as you might have hoped or you’ve chosen the wrong product. Regardless of the reason, the result is that there will be no new sales, which means you’ll lose out because your prices are already low. A reduction in the price of your products will shrink your margins and could prove fatal. That’s especially true if the economy has either stagnated or on a downward curve.
Another disadvantage is when you have ‘cherry pickers’ or ‘pantry stockers’. Already mentioned above, these are the type of customers who will only buy the lines that you have reduced. This can drastically impact your profit margins and force you to up your prices to make up for the loss.
A third problem you could face is unhappy customers. That could be because the product you’ve chosen as your loss leader has sold out quicker than you had anticipated. Thus, when they visit your store and don’t find what they expected, they could very well leave without buying any other products.
Who should invest in a loss leader pricing strategy?
Given the above advantages, it’s easy to see why you would want to invest in this pricing strategy. But that doesn’t mean that everyone should attempt it.
Let’s say, for example, that your business is in a niche market with little to no competition. Or where you’ve located your store is far away from direct competitors. In either case, using this strategy wouldn’t be as effective. That’s because your customers are already visiting your store for a specific reason - to buy your product. They know what they’re going to get so you don’t need to entice them further.
However, if you were a business with many competitors nearby and trade in multiple items, it’s a strategy to consider. Mind you, as soon as you’re able to bring shoppers into your store, it’s vital that you follow through and present other deals and expose them to more of your stock so that they stay shopping in your store for longer. The way you layout your store and products can assist you here.
That said, you shouldn’t attempt this strategy if you can't satisfy the product needs of the majority of your customers. In that sense, it might only be worth it if you’re a large retailer with both the capacity and stock resources to fulfil customer needs.
Of course, that doesn’t mean you can’t use this strategy if you’re a smaller retailer. If you intend to implement it, you must first identify your target market and know them inside out. Here, the plan would to be specific and target those customers that are most likely to return to your store instead of everyone. You could also use it
to entice previously lost customers to return.
As for how you should use this strategy in store, it’s a good idea to avoid those categories where there are already low margins on items. It’s also worth avoiding using it for any product grouping that has been given an image enhancing role since you’ll have very little chance of making up the loss with accessories.
Let’s take the Appliances category, for example. If you choose a microwave as a loss leader, there is very little chance that you’re going to sell a refrigerator along with that item, or even a television. In this case, you’d be better off choosing a product that is more valuable. After all, you’re looking to entice more shoppers to visit your store. It’s next to impossible to do that consistently if your customers don’t see value in what you’re offering.
What type of product makes for a good loss leader?
Now that you know about the various pros and cons of this strategy and who would benefit from it most, it’s time to look at makes a worthwhile loss leader.
It does depend on the range of products you have on offer. What makes a good loss leader could be based more on what you know will entice your target market to visit as opposed to following what your competitors do.
Below are a handful of characteristics:
One, the product is elastic to price changes. Your ability to know what your shoppers want will allow you to understand the price elasticity of a product, which means you’ll know which products should be offered on promotion regularly to sustain loyalty.
Two, it’s a frequently purchased product. It could be a low-priced item that is in high demand and well known by the market or a regularly priced item that a large majority of your customers want. It’s not a good idea to use a new product that doesn’t have a track record since you have no way of knowing if you’ll get a good enough return on your investment.
If you’re looking for apply this strategy to new products. It’s better to first wait at least six months to a year instead and then inspect your retail data.
Three, it’s a perishable product to discourages stockpiling or an item that you wouldn’t want shoppers to buy without adding other items to their basket. Here, it’s a good idea to use your daily staples as loss leaders such as milk, bread and so on. Since you know that your customers visit your store for these items, you can focus on encouraging them to pick up other items where in-store.
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