Loss leader pricing strategies have gained popularity and support in recent times. Above all, this is thanks to eCommerce businesses and marketplaces that have very large product catalogues. These risky strategies aim to increase the cross-selling of products through unbeatable prices, which are below market price, on the product that is of primary interest to the consumer.
Above all, this pricing strategy is a great opportunity to stand out in the market. While it’s ingenious, it does involve some risks for your eCommerce business that you need to know before launching since you’ll need to have very accurate measurements of your profit margins and sales prospects. How can you implement a loss leader strategy safely?
The main advantages of a loss leader strategy
Loss leader pricing strategies are characterised by setting the sales price on certain products below the real cost. The objective of this type of strategy is to maintain a higher outflow of stock with compensation through the average transaction size thanks to the related sale of additional products at a price that is higher than market price. So, you could use this type of strategy on products that other products need in order to be used. This strategy is often used by eCommerce stores in the technology field that sell large components at significant discounts while inflating the price on peripheral elements, accessories, or even cables.
Obviously, this has one direct advantage, which is capturing the attention of consumers through a star product that they can get at a much cheaper price than in any other eCommerce store. This will allow the online store to beat the competition while gaining a good share of the market through the sales it has earned.
In addition, it’s precisely this attraction element that allows the eCommerce business to awaken an interest in future purchases in both its actual and potential customers, thus gaining a higher penetration rate for repeat purchases.
What prices compensate for a loss leader strategy?
The basis for a loss leader strategy is the abrupt reduction in price on key items in the catalogue, which will be offset by the sale of additional products. Therefore, you must carefully calculate what the compensation will be to avoid incurring losses when executing this strategy.
The calculation of compensation should clarify both the discount that can be applied to the main product as well as the increase in price for the accessories.
To calculate this, you must consider two factors:
- The sales forecast: you must know the market as well as the buying habits of the consumers thoroughly. This will allow you to make an estimate that is as true as possible of expected sales, possible user acquisition, and the number of transactions with the lowered price. Then you can adjust the discount based on the expected recovery percentage.
- The market margins: When it comes to applying these prices to the products that must offset the price of the main product, you must be cautious and understand what the logical margins in the market are. Your consumers’ perception of you could be negatively affected if they detect the use of abusive pricing.
A quick trick, just to establish at first glance if carrying out this type of strategy is worth it, is to increase the price on the complementary products at a rate that is equal to the discount on the main product. This will allow you to see if the action is considered exorbitant before you begin playing with the values of the remaining factors involved.
Audience perception: the great risk
There’s no doubt that loss leader strategies also carry risks for the eCommerce stores and brands that implement them. We can classify these as either economic risks or risks to your image.
First, the more obvious one is the economic risk. The problem is that if this action hasn’t been calculated correctly, it can be a pricing strategy that carries a real loss. In addition, you have to take into account the evolution of the current online consumer, who now has a vast knowledge of the market, including where they can go to get the cheapest items and what is asked in exchange. In some sectors, price monitoring by users has become popular, like in technology sales.
To this, we must add that the characteristics of new digital users make them much less likely to fall into the “trap” that a loss leader strategy tries to create. Knowing that this is a common action used by some stores, they’ll choose to only buy the main product at a great discount, without adding any other items to their shopping cart, thus limiting the effectiveness of the strategy.
On the other hand, this same knowledge that the audience has of the strategies brands and stores of all types use is exactly what can make them view this type of action negatively. Don’t forget that you’re hiding a trick behind attractive discounts and this can make potential consumers suspicious. They won’t hesitate to report this to the rest of the community.
At the same time, it’s no less risky to implement a loss leader strategy and then later returning to normality. This change could disappoint your costumers, who will refuse to return to your store.
In short, loss leader pricing strategies are clearly attractive due to their efficacy with a large number of consumers, but you must carefully calibrate the applied values to avoid incurring real losses or any of the other risks associated with this strategy.