Loss leaders in retail are items or merchandise that are offered either at a significant discount, at minimum profit margin, or sometimes even below cost to entice shoppers to make a purchase.
This pricing strategy has been used by many big box retailers and discount stores to encourage impulse buys and has been met with great success.
Simply put, the intention behind this marketing tactic is to bring shoppers in-store and once they’re there, encourage purchases of higher margin items to make up for the profit lost on loss leaders.
Examples of Loss Leader Pricing
You have probably encountered loss leader pricing more often than you would think while shopping. Can you think of a sale that seemed too good to be true? Your local grocery store may have been selling eggs at a steep discount or your favorite clothing brand may have sent you an email advertising their sweaters at a ridiculously low price point.
These deals may have you thinking “there’s no way that the retailer is making any money on these items”. And in most cases, you’re right! Let’s take a look at some common examples of loss leader pricing in retail.
1) Grocery Store Staples
Grocery store staples such as milk, meat, and eggs work really well as loss leaders. Because they are regularly bought commodities, discounts and low prices are sure to attract shoppers. These items are strategically placed at the back of the grocery store to promote impulse purchases. Because shoppers have to walk to the very back of the store to purchase these staple goods, it is likely that they will be enticed to purchase other items as well.
Printers are also commonly used as loss leaders to encourage shoppers to purchase complementary items like ink and printer paper. While printers are often sold at or below cost, the price of ink is extremely high. Loss leader pricing is used to get shoppers to purchase the printer, and create the demand for ink which again, is relatively expensive.
3) Gaming Consoles
While the price of gaming consoles may seem high, they are actually sold at or below cost. For example, Microsoft Xbox gaming consoles are strategically sold below cost to encourage consumers to buy higher margin video games.
The Pros and Cons of Loss Leaders
1) Sell Slow Moving Inventory
If you have a slow moving or overstocked inventory item, choosing to price it as a loss leader can help you move it faster. This will result in more shelf space, less inventory, and an increase in cash flow.
2) Promote Complementary Items
Strategically choosing your loss leaders can help you increase sales of other items in your store. For example, let’s say you’re looking to increase the sale of a certain brand of women’s razor blades. In this case, you would price the associated razor as a loss leader. Once consumers buy the razor that complements those razor blades, they’ll have to come back to purchase the blades as well (which you can choose to sell at a higher margin).
1) May Hurt Your Brand Perception
Drastically discounting items can affect how consumers view your brand. Many shoppers associate lower prices with poor product quality. And overusing loss leader pricing can give consumers the wrong perception of your retail store. Remember people want high quality merchandise at good price points, not garbage.
2) You can Lose Money
There is risk associated with loss leader pricing – which is why you must closely monitor sales of complementary products and of the loss leaders themselves. There is a chance that customers will only purchase the loss leader itself in high quantities. Meaning lower or no sales of complementary, high margin items which results in less profit for your store overall.
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This week, I sat down with Karen Wong, the CEO and Founder of both ACE POS solutions Ltd. and TakuLabs. Ltd. She stresses that while the retail industry is going through many changes, the reality is that, physical retail is far from dead.
About Our Founder
Before co-founding Takulabs, Karen has been a part of several ventures – from being a small retail business owner herself, to working in marketing,manufacturing, and wholesale. Her passion lies in helping retailers sell more by building solutions that drive store growth.
The goal of this video series is to share Karen’s broad knowledge of retail and marketing with fellow store owners.
This talk will dive deeper into the importance of physical retail and the pros and cons of physical retail vs. e-commerce.
Do You Think Physical Retail is Going to Die?
Everybody has probably heard of the “retail apocalypse” – meaning physical stores are dying. The headlines are all about how the big chains are closing down. But in my opinion, it’s heavily overblown. The reality is that 85% of retail is still physical!
It’s not just about one channel. Increasingly, it’s all about being accessible to customers wherever they are. Because customers don’t just want to engage through shopping – they want to engage through discovery.
What is Shopping and What is Consumption?
There is a difference between shopping and consumption.
Shopping means that there is a discovery process. It means you are looking for something but you need more information.
Consumption means you that you are just refilling the pantry. You buy the same brand every time so you just need to find a place to buy it from. In this case, people may just go online.
Why do you Push Physical Retail so Much?
A lot of our customers are established businesses. That means that they are already profitable businesses with fixed costs. But these fixed costs are covered by the fact that they have ongoing business that covers those costs.
Retailers should be leveraging their business while trying to grow their physical and digital channels.
Right now, many of our customers have those established doors and there’s so many reasons you want to push physical retail vs. only e-commerce.
When people say that “I have to go digital, I need to open an e-commerce store”, my first question to them is: have you optimized everything you are doing in your physical store?
You already pay those fixed costs. Everything you sell, you make a higher margin because your fixed costs are already covered.
What are the Pros and Cons of E-commerce vs. Physical Retail?
There are so many pros and cons to e-commerce.
Pros: everybody wants to be found immediately and they want their catalog up there – because shoppers like to see that information. But at the same time, there are huge costs associated with e-commerce.
People are much more price conscious online vs. in-store.
Free shipping is a massive cost.
People are more inclined to return items online. The return rates are proven to be more than double than what they are in-store. People are more likely to return online because there isn’t that interaction where people have guilt involved – when you are returning something to the store and you know it shouldn’t be returned.
So you have to think about these additional costs of going digital. Even though there are supposedly no overhead associated with those sales.
What are the Benefits of Leveraging Physical Retail?
Other things you want to think about is that if you don’t leverage physical retail, you are missing out on things such as impulse buys. When a person comes into the store looking for one thing, they often leave with multiple things. It happens to me and still happens to me all the time!
You should also consider thinking about cross-selling and up-selling. You have people in the store and you yourself (if you are in the store) are probably the best person to tell people “that item that you’re looking at really goes well with this”. Or maybe even get them to buy something even better than what they were originally considering.
The Future of Physical Retail
All of these things and moments are part of the reasons why I don’t think physical retail is going to die. It’s just going to be a major core or focus of retail as we move forward.
I mean after all, you are seeing more and more pure e-commerce businesses are opening physical stores because they’ve realized they can make more money in physical stores than they can online.
It means more engaged customers that come back with repeat business.
Data Analytics in Retail
Another thing that you want to note is data analytics in retail(this is where I talk a lot to customers about using technology). Those stores are famous for using data and using the data well to make sure that everything they are doing in that physical store is being driven by some type of statistic or analytics.
This is kind of my reason for encouraging customers to really reconsider re-vamping or reviewing the operations of their physical store first.
But what are the benefits of having cloud technology in your retail space?
3 Key Benefits of Cloud POS for Retailers
1) The ability to sell and operate from anywhere
Web-based POS solutions store data in the cloud which makes them available around the clock for authorized users to pull reports or manage inventory right from the comfort of home or while on a business trip. In comparison, traditional, installed software requires managers to be on-site in order to gain access to important business information such as sales and inventory reports.
With a well-designed cloud POS system, retailers also have the advantage of running their POS software on any hardware from iPads to Windows computers. This flexibility means that retailers are not tied to a specific operating platform. Retailers using traditional POS software and are looking to make the switch to cloud, can do so easily with their existing hardware.
2) Reduced Ongoing Costs
In the long-term, cloud POS software is more cost-efficient than traditional software. This is due to the elimination of many hidden ongoing maintenance costs associated with installed software. In comparison, cloud-based POS solutions requires minimal upfront investment, have little to no downtime during updates, and reduce the amount of in-house technical support and post-sales support required.
3) Access to Real-Time Business Information
Cloud POS software also comes with the benefit of easier access to real-time information. In other words, inventory and sales data is updated as products are received or sold rather than every few hours or daily. If used well, more timely data can help to eliminate significant inventory costs by minimizing stock-outs or overstocking slow sellers. This is particularly important for retail businesses that have multiple locations where consolidated sales and inventory data is critical to purchasing decisions. At the same time, a well-designed cloud POS software will have real-time marketing integrations that help drive more local traffic to your retail store.
For more information on how retail technology can be used to drive growth and improve operations, sign up to receive our monthly blog updates.
I’m Karen Wong, contact me if you’d like to connect. Follow me on LinkedIn.