Loss leader

In marketing, a loss leader is an item that is sold below cost in an effort to stimulate other profitable sales. There are several varieties of these profitable sales.

Sales of other items in the same visit

One use of a loss leader is to draw customers into a store where they are likely to buy other goods. The vendor expects that the typical customer will purchase other items at the same time as the loss leader and that the profit made on these items will be such that an overall profit is generated for the vendor.

An example would be a supermarket selling sugar or milk at less than cost to draw customers to that particular supermarket chain. Wal-Mart uses some toys as a loss leader, leading to the potential demise of toy-only competitors like Toys 'R' Us and FAO Schwarz.

A loss leader is typically placed at the back of a store, so that purchasers must walk past racks of other displayed goods which have higher profit margins. A loss leader is usually a product that customers purchase frequently: thus they are aware of the usual price and that the offered price is a bargain. Items offered as loss leaders are often bulky or perishable, making it difficult for the customer to buy in bulk and thus avoid repeat visits to the shop.

Under some jurisdictions, this is considered dumping and is illegal.

Sales of related items over time

This is also known as the razor and blades business model, referring to the most famous example. Razor handles are sold at a loss, but sales of disposable razor blades are very profitable.

Temporary promotions

Loss leaders can also be attempts to build a customer relationship. For example, a grand opening sale at a new store might lose money in hopes of creating customer interest and building customer loyalty. A new restaurant may serve larger or higher quality meals during their first couple of weeks than they plan on doing in the future. The high value meals act as loss leaders, creating a marketing buzz. Drug dealers often give away "free samples" of addictive drugs for similar reasons.

Examples

• The Wendy's fast-food chain has a "value menu" of low-priced items to draw customers to the restaurant, where they may decide instead to buy higher-priced sandwiches.
• Movie theatres often use the movies themselves as loss leaders, making up the loss on high-priced snack concessions.
• Convenience stores that sell gasoline often do so at a loss, relying for profits on increased sales of snacks and coffee to stopping motorists.
• American businessman King Gillette famously invented the razor and blades business model, in which safety razors were sold or even given away as loss leaders so that his company could profit by selling disposable razor blades.