Characteristics, Examples, Advantages, and Disadvantages OF loss leader

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Ever wonder why milk is so inexpensive? It’s a staple in most American homes, so why isn’t it conveniently up front?

Without even knowing it, you’ve encountered a loss leader pricing tactic.

Loss leader pricing is a practice businesses use to price certain items — like bread or milk — below the cost it takes to produce them in order to bring buyers into the store and entice them to purchase other items — like, say, cereal, a candy bar, and some laundry detergent.

It’s a smart strategy, especially since recent surveys have found the average consumer spent $182.98 on impulse buys per month. That’s over $2,000 per year!

Let’s take a look at the types of loss leader pricing, some advantages and disadvantages of the practice, and finally, a few examples of businesses that employ this strategy.This stretegy used widely by corporates. I WILL DECODE all the secrets of this loss leader stretegy and How to apply, in this class.SO, if you wanna more about losss leader stretegy..Let’s get in to the class.

What is loss leader?

A loss leader is classified as a pricing strategy where the product is sold at a lower price than the existing market price in order to pull the customers.

This pricing strategy is used purposefully in order to attract customers to the store wherein the retailer sells the few products at a loss but makes up for the losses by selling other products at a higher price.

The loss leader strategy is a combined marketing and pricing strategy which is used by retailers in order to pull the customers towards their store wherein it is expected that the customers will also buy other products along with the cheaper product.

The profit that is made on these products is such that the loss of products sold at a lower price will be recovered by the vendor. The term loss leader is used in the sense that the product is sold at “loss” so that it leads the sales of other products which, when combined together result in bigger sales and much larger profit. The loss product is priced at a price which is below the minimum selling price of the product.

It is the duty of the firm to maintain a detailed analysis of the accounts of both loss leader as well as the associated expensive products so that it can analyze and submit a report about how well is the scheme performing.

Is to be done as soon as possible so that the vendor does not suffer a net loss on the product. More often than not, the loss leader pricing strategy is implemented by retail businesses in order to attract customers.

Loss leader strategy is also applied by E-Commerce businesses order to attract customer traffic to their websites so that oscillator strategy can be implemented on the websites as well.

The cheaper products are displayed in front of the customers on the landing page wise the customers are expected to purchase other expensive products which will make up for the loss of the inexpensive product.

The strategy is commonly used in case of magazines where free copies of magazines are given with the subscription purchase. Other organizations introductory pricing works in a similar way.

The strategy of Loss Leader has been implemented by many companies with tremendous success. Most of the days of loss leader are seen on black Friday deals of retailers which are mostly after Thanksgiving.

The deals start at early in the morning, and the products are sold at a price which is a fraction of the actual retail price which is why the shoppers flock to the store instead of going to another store.

One of the successful strategies is to place the products of loss leader at the end of the aisle because of which the customers will have to walk the entire length aisle, during which they may get attracted to other products in order to compensate for the loss in the pricing of a loss leader. Sometimes the products that are placed in between the loss leader and the customers also have decent deals.

Those items may not be comparable to the loss leader, but they are definitely cheaper than the products at the other retail store. The idea is to entice the customer with the loss leader and make them buy other products as well as leading to bulk purchase.

Characteristics of Loss Leader

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Following are the characteristics of Loss Leader:

  1. Tactful placement: Loss leader requires placement in such a way that it would be mandatory for the customers to walk down the entire length of the store. This exposes the customers to the products which he may purchase on the way, thereby increasing the revenue and sales of the store. The placement should usually be at a place where there are other related products of premium category so that customers may buy those products.
  2. Limited availability: The products sold as loss leaders are often provided with limited availability so as to discourage the customers from stocking the products and avoid repeat purchases. For example, only 20 units per customer. Perishable products such as vegetables and fruits cannot be stockpiled by customer.
  3. Customer attraction: Sometimes, premium products are sold as loss leaders in which case they are not placed as premium but are placed as a premium offering at a lower price. This also attracts the onlookers and window shoppers who would not have turned in the shop for any other reason but now, would be attracted to come in and may use few services or purchase few products.

Example of Loss Leader

One example of a loss leader is giving out free samples of food in a supermarket. The retailer gives away free food samples in order to attract more number of customers to the retail store. It is ensured that the promotion of this offer is made everywhere so that it reaches a lot of customers.

When the customers go shopping in the retail store for their free food samples, they are made for walking down the aisle which has multiple products which may be caused there then the product intended. This is done in order to attract the customer and to buying the stuff that they had not planned for.

Once the customer buys the product, the losses that are incurred because of loss leader are recovered by the sale of the other products.

One of the classic examples of a loss leader is the spelling of iPhone and other latest mobile phones with tie-ups with service providers.

The price of the phone comes down with the tie-up with the service provider, but these tie-ups are usually longer, that is for a period of more than one or two years during which the customer will have to pay a fixed monthly bill to the service provider.

Instead of charging this as an EMI, the same amount is placed as a bill to the service provider, which give the psychological effect of the price of the phone coming down. The losses of the phone recovered from the monthly bills of the service provider.

Advantages of Loss Leader

Advantages of Loss Leader

  1. Loss leader strategy, when performed correctly, not only brings in new customers but also is able to pull back old customers, which may have stopped shopping at the store due to various reasons.
  2. Loss leaders help to break brand loyalties of customers by providing such a low price that it is impossible to resist for 8 out of 10 customers. Pricing incredibly lower than competition often helps to break brand loyalty.
  3. A small loss, from the seller’s point of view, is often required in order to make larger profits.

Disadvantages

Disadvantages of Loss leader

  1. Stock maintenance is an issue in case of loss leaders because there may be several customers who simply buy the loss leader and do not buy anything else. In such cases, the seller has to ensure stock is maintained for other customers as well and bear the loss incurred against the profit.
  2. Pricing is an important factor in the success of Loss Leader. The price shouldn’t be too low that the retailer is not able to recover the losses. The pricing should be done in such a way that the loss should lead to buying more products.Businesses these days are becoming increasingly global. They are reaching out to every corner of the globe to make their presence felt and gain customers. This requires a centralised objective and goal in place to start off with and strategies to achieve these common goals, which is called as ‘Transnational Strategy.’The business arm in every part of the globe needs to work in tandem and work towards achieving the same objective and not different ones.

    This requires significant planning and strategising. Every country has a different culture, different people, different languages, different laws and most importantly a different business climate. In spite of all this a business has to be able to weave the resources together to stitch their final outcome while respecting and taking cognizance of the various difference that arise as a result of multi country operations.

    The objective to be achieved has to be the same in every country. The business has to go about its operations in different ways to suit the location of existence but will have to work toward the same objective.

    Cultural differences are difficult to tackle as they are sensitive issues and need to be dealt with patience and understanding. What is important is coordinating value added activities that can affectively harness the potential that lay within the similarities and differences of the markets.

    Learning and experiences from one market need to carried out to other markets. Needless to say, it is imperative that the marketing strategy needs to be in sync with the overall transnational strategy.

    There are companies that use different brands in different countries as each brand has a particular type of positioning that appeals to people of a certain culture and practice. Other businesses use the same brand name in all the countries. Recently a study from Harvard Business School has suggested that having the same brand name across all the countries of operations makes the transnational strategy more effective.

    Another important aspect of transnational strategy is contingency planning for unforeseen circumstances. This is considered by very few companies. Because of geographical differences that arise between countries, some countries are more prone to natural disasters as compared to others, Example Japan. Companies also factor these attributes when they make a transnational strategy.

    Examples of Transnational Strategy Analysis & Marketing Swot Strategies

    Apple is a good example to take. Ever observed the layout of Apple authorised retailers in India? India does not have Apple Stores yet but there are many authorised and exclusive Apple products sellers like iStore, Nyasa, Maple etc. Apple has mandated all these stores to have their store layout and interior design in sync with the Apple Stores. The kind of furniture used, or the way the products are displayed are all controlled by the head office. This is a classic example of marketing strategy being dictated by the transnational strategies. Apple wants to give the same look and feel to its customers all over the world. It does not want to compromise on the simplistic sophistication that its stores display.

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    McDonalds is another good and common example to take. The menu of McDonalds is decided by the country they operate in, the country’s culture, its people’s tastes and preference and is influenced by the most common local ingredients. But if you see the overall feel and look of every McDonalds outlet, they keep it the same. Also the concept of combo meals or the iconic happy meal are all present and are offered to the customers. This ensures that the look and feel and concept of the outlet remains the same, but it also adapts to cultural preferences!

    Every organisation has its mission and vision statements. These statements serve different purposes in every organisation because they provide guidance and definition in regards to the manner in which businesses and operations are carried out in the particular organisations. Thus they are all important in as far as organisational management and growth is concerned. However, it is also fundamental to understand that there is a difference between these two statements.

    Vision only describes the future ambition that revolves around the organisation. It is about the futuristic aspects of the organisation or where the organisation wants to be and the manner in which it pictures itself in the long term.

    On the other hand, mission talks about the path that the organisation will have to take in ensuring that the vision it has stated is realised. Mission primarily provides answers to the question of “why do we exist?’ It is a statement that describes the core function of the organisation.

    One important thing that you need to know is that mission needs to be written in short manner and a concise statement. By this, it means that it should be in a position of passing the T-shirt test, which means that it should be able to be printed on a T-shirt but at the same time remain readable. That is one of the differences between vision and mission.

    Whereas mission needs to be a concise but compelling statement, vision needs to be relatively longer than a mission. It should be informed of a description in written in a paragraph or a page depending on the content. Vision should at every time communicate or portray the future of the organisation in regards to its operations.

    The other difference is that vision incorporates the entire organisation. What it means is that vision talks about every aspect of the organisation ranging from the personnel, shareholders, partners, management and community among others. It is very different from the mission which mostly focuses on individual elements like employees, and more importantly ways that can be used in making sure that the organisations become a better place for the customers.

    When coming up with a vision statement, it would be important to ensure that the statement answers this particular query: if the organisation was to exist for the next ten years, what would it look like if it achieved all its strategic objectives? An ideal vision statement should inspire and at the same time be an aspiration. It is also significant to ensure that the vision statement is described in such a manner that it challenges the personnel of the organisation but at the same time inspire them.

    On the other hand, the mission statement describes how and what the company, department or unit does and its general intention. It should be noted that the mission plays the role of communicating purpose and direction to some individuals like employees, suppliers, vendors, customers and other relevant stakeholders. You should also note that the mission statement can be changed or modified to reflect the priorities of the company and approaches of accomplishing the vision.

    However, vision statements should not necessarily be revised thus the need for ensuring that the organisations come up with one that is solid enough to weather all the happenings that may take place within the short or long term in the environment.

    Lastly, the other difference between these two statements revolves around how they fit with strategic planning. When it comes to mission statement in this regard, it should be able to be reviewed at the start of every strategic planning process. It is the board to determine whether or not internal or external changes are necessary for revising in a mission statement.

    On the other hand, vision statement can be drafted when strategic planning process is taking place if an organisation does not have one. It is the reason it is important for every stakeholder to be involved during strategic planning.

    Example of Mission vs Vision

    To better understand Mission vs Vision we have mentioned below the vision and mission of McDonalds.

    McDonald’s vision
    McDonald’s vision is to be the world’s best quick service restaurant experience. Being the best means providing outstanding quality, service, cleanliness, and value, so that we make every customer in every restaurant smile.

    McDonald’s Missions
    Be the best employer for our people in each community around the world
    * Deliver operational excellence to our customers in each of our restaurants; and
    * Achieve enduring profitable growth by expanding the brand and leveraging the strengths of the McDonald’s system through innovation and technology.
    * Try to fulfill our customer, automatically our profit will improve.

    As seen from above, the vision of Mcdonalds is to be the best quick service restaurant and to make their customers smile. This is a long term goal of the organization.

    The mission on the other hand mentions the employers, the process as well as the brand and more importantly the way through which the organization is going to achieve its vision.

    Thus, if vision is the final destination, the mission is the road which has to be traveled to reach the vision.

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