If you’re a regular reader of the Prisync blog then you’ll know we try to teach you the dangers of using a race-to-the-bottom approach with your pricing. We actively seek to provide you with pricing strategies that allow you to raise your prices and still keep a competitive advantage.
But things are different this blog post…
In this blog post, we’re going to look at pricing differently and consider incorporating an aggressive loss leader approach in order to gain competitive advantage.
An eCommerce loss leader pricing strategy involves setting one or two of your products to be sold at a lower price – a price that actually puts you at a loss – in order to get your customers through the door (or on your website).
You do this in the hope that once they’re on your site, they’re more likely to buy your other (normally priced items).
In this post, we’re going to look at the advantages and disadvantages of loss leader pricing, how to implement effectively and some real use-cases of the strategy in action.
It’s important to note that although the process of loss leader pricing involves setting prices that are at or below profit, it is not the same as a race-to-the-bottom approach (which we do not always recommend).
A race to the bottom approach is what happens when you lower your prices with no strategy in mind, other than to be lower than your competitors. What happens is you end up repricing your products so low that you barely make a profit on any of them.
Whereas, a loss leader is specific products being sold at a loss as a way to entice people to come to your store and recoup the profits on other products.
Disadvantages of loss leader pricing
It makes sense to start with the disadvantages simply because this is an approach that needs to be carefully considered before implemented. One of the biggest disadvantages of loss leader pricing is the concept of Cherry Pickers. These are customers who will be enticed by the low priced product, but not stay on your site to buy other items.
So because they’re not buying any of the full-priced items, you are actually selling that product at a loss and are unable to recoup the costs lost from the full-priced items.
It’s impossible to know how susceptible your ecommerce store is to cherry pickers, but keep in mind, if your business model generally lends itself to people looking for a bargain, you might be more prone to having cherry picker customers.
Advantages of loss leader
One of the main advantages of the loss leader approach is the ability to help you enter a new market. Especially when you’re a new brand offering a new product, it can be difficult to convince people to shop with you, especially if there is already a saturated market.
Despite the fact that people tend to like to stick with what they know, loss leader provides you with an opportunity to allow newer products to get some attention. It also means there is less risk for anyone opting to buy the cheaper, loss leader product. They are therefore more likely to keep your brand as a consideration.
Second to that, ecommerce loss-leader pricing is a great way to promote the other products in your store.
The aim of a loss leader is to get people through the door. You then use your other assets like customer experience, value proposition and great product selections to entice them to buy other things too, all with the aim of recouping the lost profits from the loss leader product.
An electric toothbrush is a great example of a loss-leader product. This electric toothbrush costs £99
Although we do not know the manufacturing costs for these toothbrushes, we can assume they make most of their profits on the replaceable toothbrush heads.
When you think about an electric toothbrush, you don’t tend to buy them often. And so brands can afford to sell them at a loss because they know they’ll easily recoup their lost profit costs form the toothbrush heads which need to be changed much more regularly for great oral hygiene.
So if you want to implement a loss leader strategy and are worried, consider whether you have any add-on products where people would need to come back to your store to make a further supplementary purchase.
The Amazon Kindle is another great example of a loss leader. Although it started out as an e-reader they have since developed it to become a fully-fledged tablet. They can afford to sell their bundles at a loss because they understand the power of the upsell.
If you have a kindle, it’s likely you’ll want to make use of the other add-ons such as apps, films, music, books etc.
But in order to do this, you have to first be on the Amazon website (or app) and second, pay for them.
Therefore it’s apparent Amazon takes this into account when pricing their tablets knowing they can recoup the costs elsewhere.
Loss leader doesn’t just have to refer to all physical products either. If any of your products have a digital element, then offering the main product as a loss-leader can put you in a competitive advantage.
Ecommerce Loss Leader Pricing Strategy Takeaways
In this post, we have explored how a loss leader strategy is different from a race to the bottom approach. We have looked at why you set a loss leader product with a price that doesn’t make a profit, but we’ve also looked at some of the benefits of doing so.
Just because the idea of a loss leader is to not make the profit, that doesn’t mean you don’t make any profit at all, not at all. It just means you don’t make a profit on that particular item.
We’ve also provided you with a number of examples of good use cases for a loss leader approach, but those aren’t all. Loss leader pricing also works well in fresh food, tech, and the hardware and tool industries.
But remember, with every pricing strategy, there is a good and a bad way to implement it. So before you blindly jump in and set specific products at a profit loss, think about the strategy, what do you hope to gain by setting that low price and what do you hope people go on to buy as a result?
Have you tried an ecommerce loss leader pricing strategy?