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What is Loss Leader Pricing?
A loss leader pricing strategy is an aggressive pricing strategy, where the product is sold at cost, or less than cost, to attract customers. The product which uses such a pricing strategy, is termed as a loss leader.
This pricing strategy is employed by retailers selling a wide range of products. The retailer knows that the products earmarked as loss leaders won’t make any profit, but will act as anchors, or crowd pullers. The retailer will make for the loss of loss leader products on other products, where the profits are high.
In India, loss leader pricing has been practiced successfully by many retailers, especially Big Bazaar, which started the trend. Big Bazaar widely advertises best deals (often loss leaders) to pull huge crowds to its stores. Big bazaar’s sales have been newsmakers, with people queuing up hours in advance to lap up the deals. Other supermarkets, hypermarkets and specialty stores have followed suit in implementing such a strategy.
The after effect of such a strategy has resulted in “Cherry Picking” by shoppers. Cherry picking is a phenomenon where shoppers move from one retail outlet to another, to make purchase of the best deals (Read lowest price) among all retailers. Cherry picking by shoppers renders the entire strategy of the retailer to be pointless, as the shoppers buy only loss leader products, but not other high margin products(which is the original strategy of the retailer). However, the practice of cherry picking is not as widespread as on date.