A loss leader is a product or service you sell at a discount to capture customers. Using loss leaders as a strategy is beneficial when you are building a new product or service. By launching something at a loss, you can gain traffic and awareness. You can start reaching niche audiences before they are locked into other products or services by your competitors.
Understanding The Loss Leader Concept
The loss leader strategy is a marketing technique that involves selling a product or service at a loss to attract customers. The rationale behind this strategy is that once you get the client in your store, they will purchase additional products. Therefore, loss leaders usually attract traffic to a store and sell the customer other products.
Companies like Amazon, Google, and Microsoft often use this method as part of their business model. For example:
Amazon sells its Kindle e-readers at cost, so it can make money by selling ebooks for the device later on.
Microsoft offers free Windows updates to entice people into buying an operating system (OS). Once installed on their computer, users are more likely to purchase Office software from Microsoft, which is compatible with Windows OS.
An Old Idea That Remains Valid Today
The concept of ‘loss leader’ was coined in 1879 for marketing strategy. It’s all about selling something at a loss to attract customers and win them over.
If you’re looking for an example of this in action, think about supermarkets that sell milk and eggs at low prices as loss leaders. Those items are cheap compared to other foods you might buy there, and they’re intended to entice you into purchasing other products.
Loss leaders can be any good or service, but they must be highly visible so potential customers will notice them on the shelf or in-store display cases.
Why is it so important?
- It’s a great way to gain market share.
- Business owners can use it to launch a new product or service.
- It helps you reach niche audiences before they are locked into other products or services by your competitors.
- It helps you build a brand with positive associations for your company and its products, which makes it easier for customers to buy from you in the future.
YouTube is a loss leader for Google. Amazon’s websites can be seen as a marketing arm of AWS. Microsoft Windows in the 90s was also an unusual example of a loss leader, where Microsoft made money on other products and services it sold to users who bought Windows.
Every business aims to have a good market share as it is the ultimate representation of brand and customer loyalty
Market share is a measure of how much of the market you have. It can be calculated by dividing the number of units sold by the total number sold in a market, or one can measure it against your competitors.
For example, let’s say that there are 100 products in one particular category, and you sell ten units out of those 100 products; then your market share would be 10%. If you sell more than everyone else combined, your market share will look like this: (10+5+3+2)/(100-10)-0 = 60%. The higher your percentage, the better position you’re in!
Market share also psychologically affects consumers, investors, and other companies within your industry. When people see that many customers are buying your product over others, they’ll start paying attention to what makes yours so great. If they don’t see anything special about yours compared to theirs, they may try something else instead.
But what about brands that use a loss leader?
Amazon.com is an excellent example of a company that uses loss leaders to its advantage. While they offer free shipping on orders over $25, they also provide Prime membership with free two-day shipping, unlimited video streaming and music streaming, and access to their Kindle library.
Google gives away services like Gmail and YouTube for free in exchange for users letting them track their search history and personal data to sell ads on their platform. It has been highly profitable for the company because it’s estimated that each user generates $24 worth of ad revenue per year (on average).
Microsoft offers Office 365 subscriptions at no cost if you’re using Windows 10 PCs or tablets—and since most people now use these devices instead of traditional desktops or laptops, anyone can access these programs without paying anything upfront!
This strategy is beneficial when you are building a new product or service. By launching something at a loss, you can gain traffic and awareness. Doing so will help your business grow faster since people may be more likely to try something if it doesn’t cost them anything upfront. The earlier they use your products/services, the better because they won’t have time to try other things that might compete with yours later down the line!
Reach niche audiences before they are locked into other products or services by your competitors
You should not worry about losing money because if you are going to lose money, it’s better to lose it on a product that doesn’t bring in any revenue from the beginning.
The focus of this strategy should be to build awareness and a customer base for your brand. If this is successful, you will be able to get more customers with higher profit margins and better retention rates in the future.
A great marketing strategy is to create a loss leader as it keeps you in charge. But how does this work?
You can see the concept at your local grocery store or anywhere selling products with coupons.
How often have you bought something at the total price when a coupon was available for 50% off or more? What’s going on here is that the grocery store knows they will make up the difference by selling other items at full price because they have made sure they have priced their products correctly to cover their cost plus some profit margin. So even though we have saved money on one item, we might pay more than usual for another item later, but the store gets all our business anyway!
That is just one example of how one can use loss leaders effectively in marketing strategies. In this case, it was coupons and sales offers. However, these kinds of promotions are not limited only to retail stores.
They apply equally well to other industries, such as restaurants or entertainment venues which offer “all-night specials” where patrons who arrive early can enjoy lower prices during happy hours or late-night buffets. In every example, the business makes up for any losses through increased profits elsewhere.
It’s important to remember that no one can monopolize a market forever. As hard as you try, someone will always come up with something better than what you’re offering.
So you must stay on top of your game and continue innovating so that when this happens, your business can still adapt quickly enough to survive. Leveraging the loss leader concept can prove crucial in that regard.