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Heard about using a loss leader pricing strategy but not sure what it actually means and whether it would be good to use in your business? There are many strategies you can use when pricing your services or products, including a loss leader pricing strategy. As with all strategies there are pros and cons, which means it will make sense for some businesses, but not for others. Keep on reading to find out more about what a loss leader pricing strategy is and why businesses use it.
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LOSS LEADER PRICING STRATEGY: WHAT IT IS AND WHY BUSINESSES USE IT
What is a loss leader pricing strategy?
If a business uses a loss leader pricing strategy they will purposefully set the price point for a product or service below what that product or service costs. This means that for every sale that is made, the business makes a loss.
However, the purpose of using the loss leader pricing strategy is that whilst the business will make a loss on the initial sale (or that specific product or service) they use this strategy expecting the buyer to buy more than just that product or service and the other products and services are priced to achieve a profit (which negates the initial loss).
Why do businesses use a loss leader pricing strategy? What are the benefits?
On the surface it can seem ridiculous for a business to purposefully price a product or service to achieve a loss, but this is a great example of where a business is thinking about the bigger picture and so are willing to make a short-term loss for a long-term gain.
Businesses use a loss leader pricing strategy for a number of reason, but two very common reasons are: expecting to make further sales and increasing customer or client base (having a bigger market sharer).
Reason 1: Expecting to make further sales
A very common reason for using the loss leader pricing strategy is that a business expects that the initial sale will result in further sales. This happens a lot for products that require replacements.
For example, with disposable razors they’ll price the initial razor using a loss leader pricing strategy because once someone has the razor they’ll come back and buy the replacement heads and that is where the business makes money.
Another example is supermarkets at Christmas. In the UK supermarkets will reduce the price of vegetables that are commonly included in a Christmas Dinner (potatoes, carrots, brussel sprouts etc) and actively promote the fact they’ve been reduced. To some it seems crazy that the price the vegetables so low as surely they must be making a loss (I’ve never worked in the food industry to confirm or deny). However, even if they make a loss the supermarket won’t mind. Because the assumption is that if you come into that supermarket to get your vegetables you’ll do the rest of your Christmas food shop there – which includes meat, alcohol, indulgent puddings – all things that they’ll make a profit on.
Reason 2: Increasing customer/client base (market share)
Another common reason for using the loss leader pricing strategy is to undercut competitors, attract more customers or clients and grow market share. This strategy can be used when a business is new and trying to gain initial market share. It is also a strategy that can make sense when getting your customer or client base to a certain level will unlock other opportunities, such as different ways of access financial support.
What are the risks of using a loss leader pricing strategy?
Cherry picking
The point of using a loss leader pricing strategy is that someone will not only buy the product or service that makes a loss. They will buy other things. However, that doesn’t always happen. When someone buys a loss leader product and doesn’t buy anything else it is called cherry picking. And especially if you sell on online, where it is easy to compare prices and make a single purchase, there will be people who only buy what is making you a loss.
Brand perception
Your pricing should make sense for your brand and positioning. Therefore, when making changes to you pricing you have to consider what it will do to brand perception. For example, discounting can have a negative impact on business (I go into further details about the dangers of discounting here). This is especially important if you have a business that is positioned as premium or luxury. Having something that clearly feels ‘too cheap’ isn’t good.
Overworking or reducing revenue
If you are purposefully under pricing a service you have to be very careful – especially if you are physically delivering the service. Your time is limited and if too many of your services sell at a purposefully low rate you are either going to have to work more hours to make the same level of revenue or you are going to have to take a cut in revenue.
| WANT TO SUCCESSFULLY SELL YOUR WHOLE OFFER SUITE?
As you can see there are risks with using a loss leader pricing strategy, which means you need to ensure that you have a carefully crafted offer suite that you successfully sell (so you make the money back in other ways!). To successfully sell a range of services you need the right offer suite, with the right prices, and then have the right marketing and sales strategy. In a Strategy Day I’ll help design or revise your offer suite, ensure it is priced correctly, and that you have a clear strategy for marketing and selling those services or digital products. So if you want complete confidence with the services you offer, your ability to sell them and that you’ll smash your financial goals – book a Strategy Day. |
How I’ve seen service-based businesses using a loss leader pricing strategy
The reason I wrote this blog post is because whilst I’ve been aware of the loss leader pricing strategy for a long time but recently I was asked to speak for free at an event that was a loss leader and it made me think more about how service-based businesses use loss leaders.
Here are two examples of where I see service-based businesses using a loss leader pricing strategy.
EVENTS
Live events have become increasingly popular over the last few years, but there are a number of businesses that are running their events at a loss. The fact they are running them at a loss doesn’t surprise me because putting on live events is expensive. But for it to be a smart business decision you have to focus on why would it still make sense.
I’ve been to a few live events by coaches (in fact I share a review of the events I went to in 2023 here). To work with these coaches you’d need to be making a four or five figure investment. But many offering tickets for a few hundred pounds. By having a lower price way to buy from them often they’ll make people who are just followers become buyers. And we all know once someone has bought once it is easier to make them buy more.
Running events can massively increase brand awareness. With the right encouragement a coach can make the majority of attendees to an event talk about the event on social media, which increases brand awareness.
And for most of the events I went to there would be selling from the stage. This is where the business owner would share how you can work with them further usually into those four or five figure programmes.
So whilst the initial live event may make a loss it could generate tens of thousands or hundred of thousands of sales off the back.
MEMBERSHIPS
Another way I’ve seen service-based businesses using the loss leader pricing strategy is where they will set an introductory price for their memberships.
In this instance the usual tactic is to offer an introductory price to a membership (for anything from 2 weeks to 3 months) and then move people onto the standard pricing.
In most cases to pay for these memberships people enter their card details, which means that next payment is automatic. And I’m sure you can think of an instance where you have signed up for a subscription and forgotten to cancel. So whilst there will be a few people who will remember to cancel the subscription in most cases the majority will automatically roll on.
Also, membership also can be great for referrals, recommendations and upselling. If you are actively building up a fan base within your membership it can be that those people all become people who are actively referring and recommending your business. And many business owners will actively upsell to members within their membership so that can also bring in additional revenue.
| WANT TO GROW YOUR BUSINESS THE SMART WAY?
I specialise in helping online, service-based, business owners who are small in team size, but big in ambition. And that means they have to work smart. The right loss-leader can help you to build brand awareness, create more sales – and in the long-term generate more revenue. But only when done strategically. With my one-to-one mentoring I’ll ensure you successfully manage to sell across your entire offer suite and make the maximum impact and revenue – in the most efficient way possible. |
That’s it! You now know what a loss leader pricing strategy is and why businesses use it.
On the surface using a loss leader pricing strategy in business might seem illogical, but hopefully you can now see why businesses make the decision to make a loss in the short-term for a win in the long-term. Nothing is guaranteed. But by carefully planning what you want the buyer of a loss leading product or service to buy next you can use it to attract more clients/customers and create more revenue in your business in the long-term.
Will you use the loss leader pricing strategy in the future? Let me know in the comments.
And if you’d like one-to-one help to design your offer suite there are two ways I can help you.
Option 1: Get your offer suite, pricing and marketing strategy sorted in one day!
Book a Strategy Day and I’ll help you to design your offer suite, map out adding everything into your business in the next 12 months and being able to successfully market them all. To find out more and book a Strategy Day click here.
Option 2: Get your offer suite, pricing and marketing strategy sorted PLUS 6-months of training, one-to-one mentoring and accountability
Know that just knowing what to do isn’t enough, then my 1:1 Business and Marketing Mentoring is perfect for you. You’ll get 6 months with me by your side every step of the way to ensure you are able to successfully implement the strategy and get results. To find out more and apply for 1:1 mentoring click here.
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