It sounds contradictory, but the purpose of a loss leader is to make your business more money.
In general, profit should be built into every product’s price. But in some cases, it may be beneficial for your business to NOT profit from a sale.
This article explains what a loss leader strategy is, how it can be beneficial in the long run, and how a small handmade business can apply it.
What is a loss leader?
A loss leader is a product or service that is sold at a loss or for low profits in hopes that it will attract new customers, who will hopefully buy additional products with higher profit margins.
If you’ve ever found yourself thinking “you can’t beat that price”, it’s likely the business is using a loss leader strategy.
The unbeatable price is to get you in the door, in hopes you’ll buy other regular priced items once you’re there.
Using a loss leader strategy typically has a lower risk for big companies since they sell higher volumes of products (to make up for the losses or low profits on a small portion of sales).
However, your small business may be able to use the loss leader strategy as well, to increase sales and profits in the long run (this article will explain how).
Loss leader examples
Here are a few loss leader strategies you may have encountered as a consumer:
>> Printers are sold at affordable prices because once customers buy a printer, they must continuously buy the ink. The refill ink cartridges are profit producing for the company and produce repeat customers (who are also more profitable than new customers).
>> Razor blade handles are often sold at low prices or given away for free because the companies can sell the razor refills at higher prices/profits.
>> Restaurants that offer “kids eat for free” deals are getting parents through the door with their loss leader (free kids meal) because the real money is made from the food and drinks the parents purchase.
>> Dental offices often offer free teeth whitening or a free electronic toothbrush to new patients when they book a cleaning and checkup. The dental office is making their money from the cleaning/checkup and then hope new patients also pre-book their next appointment (for future revenue).
>> McDonald’s may run a “free coffee” promotion or sell their coffee at a low price just to get people to their restaurant. Because chances are, those people will also buy a muffin or breakfast sandwich with their coffee. The visit also puts McDonald’s top of mind so coffee customers are craving the food when thinking about what to have for lunch or dinner.
>> Beauty brands such as Clinique will offer a free gift when you spend over a specific amount of money. They’re taking a loss on the free items, but they’re making it up when customers buy regular priced products. And the free gift is an incentive for new customers to buy and existing customers to return.
>> Cheap rooms are loss leaders for Vegas hotels. They take a loss on room rates in hopes that guests will also eat, gamble, watch a show, etc. at their hotel.
>> Mobile networks (e.g. AT&T, Verizon Wireless, T-Mobile, etc.) often offer free cell phones when you sign up for a plan, because they make their money through the long-term contract you sign with them.
>> Costco loses money every time they sell a hot dog and soda for $1.50. But the deal draws people in and many of them end up ordering higher-priced items from the menu. Or better yet, buying their groceries and more during their visit (source).
How a small handmade business can use a loss leader strategy
I don’t recommend you sell your products at a complete loss, unless your strategy guarantees you’ll make up that loss by selling other products to the same customer.
For example, giving away a product for free may be beneficial to a business if that free product is only offered with high profit sales.
An artist may offer a free service, such as an in-home art consultation, or free framing, with the sale of a painting. The profits from the sale of the painting must be big enough to cover the cost of the free service and still leave the artist with a healthy profit.
A more risky loss leader strategy might be selling picture frames at a low cost in hopes that customers will also buy a high-profit piece of art to go in the frame. That loss leader (cheap frames) is most likely to generate an art sale, but people can go elsewhere for their art, so it doesn’t guarantee another sale.
The safer strategy for a small business is to go for a low-profit or break-even strategy.
Meaning, sell your “loss leader” products at a price that ensures you’re covering that product’s costs, but you’re not profiting.
If you have room to add a small profit while keeping your “loss leader” at an enticing price, that’s ideal.
This approach ensures you’re breaking even, and not taking a loss. Which is safer for a small business and easier to recover from.
6 Loss leader strategies
Below are ways you can increase the chances of making money when offering a loss leader.
1 – Cross selling
Make sure the item you’re selling as a loss leader goes hand in hand with a higher profit margin product. This way, customers will be interested in buying more than just the loss leader.
For example, a business may sell a cute pajama t-shirt at cost, which matches a pair of pajama bottoms, which have matching slippers and a sleep mask.
The cute top at an affordable price draws shoppers in. Once they have their wallet out to buy the top, they’re also likely to buy the bottoms, and/or other sleepwear items.
When you use a “ladder system” to create your product line, this ensures your loss leader will compliment or work with the other products you sell.
Another example would be a jewelry business selling a charm bracelet (without the charms) at a no/low profit margin price. Most customers will also buy the higher profit margin charms.
2 – Consumables
If you sell consumable items and have a high number of repeat customers who buy refills each month, your base product (that must be refilled), may be sold at cost (or slightly above), while the refills are regular priced and have high profit margins.
For example, a business may sell cleaning kits with glass spray bottles containing the unique cleaning solutions. The price of the kit may offer little profit on the spray bottles, but when customers order refills of the cleaning solutions, profits are gained.
3 – BOGO
You can set up a version of a buy-one-get-one deal so shoppers only get access to the loss leader deal IF they’re buying another high profit item at full price.
For example, a bath and body business may run a “buy a shampoo and get the conditioner half off” promotion. The profits from the shampoo should make up for the profits lost on the conditioner.
4 – Free gift with purchase
Have you ever purchased something because you wanted the free gift?
When the free gift is an enticing product (and perhaps it’s only available with a purchase and can’t be purchased separately), people will be willing to spend money on items they might not necessarily need, just to get the free product.
For example, a business may create a limited edition/collectors edition item that is only offered as a free gift with purchase at Christmas time.
A skincare business may offer a free product with the sale of a 5-piece skincare set. The profits made from the 5 items makes up for the loss on the free product.
5 – Limited quantity promotion
Running a promotion that gives the first X number of people access to a special deal can act as a loss leader and create urgency.
For example, a craft show vendor may advertise on social media or through their newsletter that the first X number of customers at a craft show (not shoppers, but paying customers), will receive access to a loss leader (e.g. a special discount, free gift, swag bag, etc.). This type of promotion can kickstart sales and continue to attract shoppers, even after the limit has been reached. Shoppers don’t know until they arrive at your booth if they’re one of the first 20/50/100 customers. And once they’re there, they’re likely to look around.
6 – Free samples
I recently purchased a facial cleanser online and the business included a sample size of a different product that addressed the same concern (e.g. dry skin). I tried the sample and visited the website a week later to buy the full size.
The company took a loss by sending me a free product, but it resulted in a sale (that wouldn’t have happened otherwise).
Allowing people to sample your product before buying can encourage people to buy the full-sized item right then and there (e.g. samples at a grocery store), or become a repeat customer and come back to buy the full size.
Keys to a good loss leader strategy
There are a few keys to keep in mind when developing a loss leader for your small business.
A) A loss leader must be a highly desirable item
Your loss leader must be an item that your target market really wants; it should draw shoppers in.
Offering last year’s shop-worn, out-of-style stock at a great price isn’t what we’re going for.
It should be a shiny new object or an essential that catches shoppers’ attention and gets them in the door so you have the opportunity to present your other highly desirable, full price, high profit items.
B) A loss leader must be valuable to customers
In some cases, a loss leader is in place to encourage future sales (as opposed to encouraging customers to add on to their existing purchase). In this scenario, the loss leader must good enough to encourage customers to come back and buy again.
If customers buy the loss leader because it’s such a great price, but they get it home and it doesn’t meet their expectations, they won’t come back to buy another item.
C) A loss leader should be a clear promotion
As a small business with a limited product line, a loss leader should be advertised as a “special deal” so it doesn’t tarnish your brand.
You don’t want consumers wondering why the price is so low (especially when compared to your other products) and asking themselves what’s wrong with the item.
When something is a limited time offer, a free gift with purchase, an introductory price, etc. it helps ensures shoppers don’t question the price or item.
On the other hand, if I’m selling luxury bags at high-end prices but one item has bargain basement price, it will trigger a red flag in the consumer’s mind.
D) A loss leader should attract your target market
Keep your loss leader on-brand and targeting your ideal customer. This ensures you attract shoppers who are more likely to buy multiple items from you and become repeat customers.
You don’t want to attract bargain shoppers who will simply buy the loss leader item and leave. A small business doesn’t have the profit margins to cover those types of sales.
I hope this article sparked some loss leader ideas that will help you drum up new business.
Hey, I’m Erin 🙂 I write about small business and craft show techniques I’ve learned from being a small business owner for almost 2 decades, selling at dozens of craft shows, and earning a diploma in Visual Communication Design. I hope you find my advice helpful!