Loss leader

A loss leader is an item sold near or below cost as an inducement to buyers. It can form one part of a company's business model. Loss leaders take on different forms. They can be initiated by retailers as well as product manufacturers.

Examples

In the case of retailers, a supermarket may sell bread at 10 cents a loaf, a price that may be significantly lower than its actual production cost. If the bread were sold on its own, it would comprise a loss to the supermarket. However, the retailer's decision to sell the loaf at this price is intended to bring customers into the store and consider purchasing other products (which would be sold above the cost of production), resulting in an overall profit for the store. The customer benefits from the low price of the bread, but the store benefits from a higher turnover of stock. Without the low cost of the bread however, the customer may never have entered the store (and purchased the other items). To achieve this outcome, the loss leader is often placed at the back of the store so customers must pass other items, as well as impulse items (such as candy).

A different example of loss leaders is promoted by the manufacturers of a product. Computer printers can often be sold below production cost. However, once the initial consumables (such as ink or toner) are used up, the consumer will need to replace them. In such cases, the manufacturer's consumables are often sold at higher than the production cost. So long as the consumer keeps using the printer, the consumables will need to be replaced, and the manufacturer will make up the initial loss of selling the printer by selling the consumables.

When physical encyclopedias were more popular in the 20th century, it may have been too expensive for customers to buy the entire set (perhaps 20 or 30 books) at once. In such cases, the earliest books in the series were sold at a loss, while the later issues were sold at a higher cost. The inducement in this case is the consumer's desire to complete the entire set.

Similar practices occur with including computer game consoles (and games), shavers (and replacement blades), as well as cellphones (and phone contracts).

Practical limitations and legality

There are often conditions placed on loss leader items, such as "limit 2 per customer" or "20 cents with $20 purchase". Depending on the product, the practice may be banned in some states in the United States.