Loss Leader

by Manshu on July 15, 2009

in Articles

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A loss leader is a product that a company sells at a loss to stimulate or promote the sales of another product.

So, if you are a retailer, you may offer a shirt at an extremely low price (below cost) just to attract customers to your store, and then sell them other more profitable stuff like shoes and handbags. In this case your shirt is your loss leader.

A low price and a loss-making price are two different things. For example, selling your own store brands is a price strategy that makes you money on the product itself. But, a loss leader strategy is when you sell a product for a loss (not a low price alone).

I was reminded of this concept today when Felix Salmon wrote that Reuters can offer its “Commentaries” for free because it helps them boost the sales of their terminals, which is their bread and butter (this is his conjecture and not Reuter’s official strategy). I always thought that they must be covering their cost by advertising, and so it was quite interesting to note that there is another angle to it as well. So for Reuters, its Commentaries are a loss leader.

This strategy seems to be more prevalent in the online world because you see a lot of stuff that’s free. But, then again, not every company that provides free online content is following a loss leader strategy. Some of them make their living through advertising and hope that advertising covers all their costs.

For example, New York Times provides all its online content free, but it’s not promoting anything by way of free content. It is trying to make its earnings through advertising. Their online content is not a loss leader for them.

On the other hand the Indian newspaper Business Standard also provides free online news, but its atrocious online format doesn’t allow you to link to it or read it easily. Looking at it, I can’t imagine anyone wanting to advertise especially on the online version or pay more for the ads because of the online version. To me, this seems more a strategy of influencing online readers to subscribe to the offline version and resembles a loss leader strategy.

Then there is the case of blogs of companies and consultants who are promoting their services. I am regularly amazed by high quality blogs by graphic designers and other such consultants, in which they feature quite a few useful – do it yourself tutorials. I have even seen many useful videos by car mechanics that teach you to change your car oil, remove dents etc.

If a car mechanic makes a video teaching you how to change your car oil, isn’t he taking away his own business? If I see that video and decide that it is easy enough for me to change my car’s oil, then that is one less customer for the auto shop.

But, at the same time I also get a feeling that if this guy is telling me all this stuff for free, imagine how much more he knows. It creates a brand for that fellow and if I need something more complex done with my car, I am much more likely to go to that guy. This is a clear example of a loss leader strategy.

Then there is the weird case of Microsoft trying to make a Search Engine and Google trying to make an Operating System. Both are likely to lose money on stuff other than their core products for years and yet they make so much money from their core products that it doesn’t matter. To them, it’s more a question of keeping the other on its toes than make any real money out of these other products. They are losing money for sure, they may remotely be promoting their own products and services, but I am not so sure this is really a loss leader strategy.

Loss leaders are great for customers because they are getting something which is worth much more than what they pay for (in some cases even free). I will certainly never spend any money on a Reuters Terminal, and so I am certainly glad that I don’t have to pay anything to read Salmon’s blogs.

Can you think of any loss leaders that you use?

Photo Credit: Amber Rhea

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