A loss leader is a product or service that is sold at a price below its cost of production or below market value (at a loss) in order to attract more customers to a business. By offering a product or service at a heavily discounted price, the business can draw in customers who might also purchase other, more profitable products. This is a sales & marketing strategy often used in short-term promotions but may also be used by prominent flagship products that attract many new buyers.
For example, a supermarket might sell a popular brand of milk at a loss in order to attract customers to the store. Once the customers are in the store, they might purchase other items with a higher profit margin, such as eggs, fruit, and vegetables.
Retail stores are known to use loss leaders as a promotional tool to drive foot traffic and boost sales. Online stores have also utilized loss leaders, such as Amazon’s famous strategy of selling diapers at a loss.
Loss leader strategies can be effective when a store is able to sell a large volume of the loss leader item. It should be noted that the strategy can be risky. If customers do not purchase additional products at a higher margin the loss leader program can lead to a significant downside.