If you want a classic pricing strategy with a history of bringing return customers, increased sales and new customers, consider loss-leader pricing. Just as it sounds, the loss-leader pricing strategy relies on having the lowest prices, or perceived lowest prices, for a given product or set of products. “If you're a retailer, you'll be very aware that sometimes consumers need a little bit of extra encouragement to come through your door,” reports Smarta.

Definition A product priced below cost, or at a loss, in order to attract new customers is called a loss leader. Loss-leader pricing the sale of certain products at, or close to, a loss while pricing related products or services high to increase profits. One popular example of this is a razor with disposable blades. Often, a store will price the razor very low, but armed with the knowledge that the consumers with need to purchase new blades, refill sets are over-priced to increase profits.

Theory In theory, “loss leaders make up for the losses they incur by enticing consumers to make further purchases of profitable goods while they are in the shop,” reports Smarta. Since many customers browse and end up purchasing more than they had initially planned, this is a smart strategy. Customers also feel good about getting a bargain, and will often buy other items with the money they just saved.

Use Loss leader pricing serves other purposes beyond driving new customers to the store. If you have merchandise that needs to be sold, either because it is due to expire, or you just need the shelf space, pricing the items exceptionally low can make them simply run off the shelves and can help make up at least a portion of the cost. Consistent loss leader pricing can build your brand as a loss-leader that will continue to draw customers, even for products that are not on sale. U.S. Legal reports, “Loss leader pricing is, in essence, a bid to lure customer traffic away from the businesses of retail competitors.”

Implementation Four main businesses will benefit from loss leader pricing. When a business first enters a new market, loss leader pricing draws attention to the new product or store to help build a customer base. Second, when you have products at the end of their life cycles, loss leader pricing can both generate renewed interest in the product and help move old inventory. "More For Small Business" reports that, “for a business-to-business product, you might sell one of your mature or declining products ... at a loss leader price and expect that customers will buy other products or services." Finally, in e-commerce situations, loss leader pricing brings customers to an online retailer using introductory pricing on items such as cable services.

Precautions There are two main precautions necessary for a successful loss leader pricing campaign. Make sure you make up your loss on other sales. “If you price something too low and people don't buy anything else, the loss leads nowhere. It's no longer a loss leader, it's just a loss,” advises USA Today. Most importantly, however, make sure that you actually have the advertised product in stock at the beginning of the sale and that the price in the store matches the price in all advertising. Failing to do this is considered fraud, which is illegal. (Ref. 3)

Photo Credits profit/loss image by Warren Millar from Fotolia.com