What is Loss Leader Pricing And How Can it Help Your Business?
Are you a small business owner who is looking for new ways to increase sales? Look no further and keep on reading.
Running a proper business isn’t an easy job, especially for the members of the Latino business community. You are a business owner, a marketing expert, a project manager and a customer relationship manager all simultaneously. It is challenging to stay on top of your game and be familiar with the tools and techniques to increase your profit.
That’s why today we will show you one straightforward and practical strategy called loss leading pricing that will increase your profits thus making a difference in your business.
What is Loss Leading Pricing?
Wikipedia defines loss leader as a “pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services. With this sales promotion/marketing strategy, a “leader” is used as a related term and can mean any popular article, i.e., one sold at a normal price.”
To put it simply, loss leader pricing is a tactic that you use to attract more customers by offering a significant discount on selected goods, hoping that other purchases customers will make once in the store will compensate and earn a profit.
You’ve probably already seen this phenomenon in your surroundings, but you haven’t been aware of it. This strategy is widespread in the current business and sales world. Yes, it comes along with a certain risk, but it brings many benefits, as well.
Benefits of Loss Leading Pricing
To get an idea of all possibilities that loss leader pricing offers, let’s take for instance a Latino small business owner who has just opened a restaurant of Mexican cuisine. Since he’s just starting out his business, he needs to win over his customers and convince them to give his delicious food a shot. It’s not an easy task, especially if there is a fierce competition.
However, with the help of loss leader pricing his restaurant will stand out of the crowd. Offering a dish at bellow cost will give him leverage over the competition, and it will remove the risk that customers have toward new brands. As a result, he’ll win over more customers, and once they are in the restaurant, the owner can surprise them with other offers that will hopefully make up for the discount losses.
Also, this restaurant owner can use again loss leader pricing once he’s established his business and he wants to promote some items. For example, he needs to stimulate sales of desserts. So, he’ll use complementary goods, like coffee as a loss leader to increase dessert orders. It’s convenient to create a special offer “Only today churros and espresso $$$.”
Disadvantages of loss leading pricing
As you can see, loss leader pricing can be used to increase your sales and help you gain more clients, especially if you are new in the market. On the other hand, this strategy also has pitfalls.
First, loss leader pricing can affect your business reputation if you offer deep discounts. Customers may perceive low prices as a cheap product with low quality. As a consequence, they will probably avoid your business since they question the quality of your products or services.
Likewise, if you use the loss leader pricing tactic too often, your customers will get used to it, and they will wait for the discount instead of making the purchase right away. They will begin to expect discounts and they will wait for them. This will have a negative effect on purchase frequency, as well as on your entire revenue.
Camino Financial provides insights on loss leader pricing tactics and how to implement it in your own business.
Once you learn how to put in practice this useful technique, apply it to your own business as soon as possible. Get ready to attract more customers and increase your sales!