Attracting customers is one of the hardest things to do in business management. If you are participating in a huge niche market, you often have to compete with the big kids on the block or smaller kids who want to take your place. If you have a place in a smaller or not-so-common niche market, you often need to make sure that there are enough people interested in your product to make good sales.
One of the strategies to attract customers is the pricing strategy. Simply put, pricing strategy is the method that businesses use to decide the price of their products. A business needs to account for several things when determining the price of their products, such as market condition, production cost, consumers’ ability, and so on.
There are lots of pricing strategies that a business can take. There is a competition-based pricing where a company decides its product’s price by looking at other competitors and uses them as a benchmark while often neglecting its production cost. There is also a cost-plus pricing strategy where a product’s price is decided by adding the amount of profit that a company wants from a product into the production cost. Other than the two mentioned, there are other pricing strategies that you can learn to step up your pricing strategies.
This article will discuss one of the most common pricing strategies, especially for smaller businesses, namely the loss leader pricing. This article will explain the loss leader definition and give a loss leader pricing example so that you can understand this strategy better and apply it to your own business.
So, what is the loss leader strategy?
When deciding the value of a product, you might be thinking that its value must be higher than the production cost. For example, if you need $8 to create a scrubber, then you need to sell that scrubber at a price higher than $8, right? Well, not always. You often need to sell a product at a lower price than its production cost to make a profit. This is what people called the loss leader pricing or leader pricing.
The purpose of the leader pricing strategy is to create a loyal customer base. The loss leader strategy allows a business, especially the new ones, to penetrate a market and gain new customers. Having low prices can help a business, especially the new ones, gain customers. Through this method, a company can expect to profit through recurring sales of their other products that are sold at everyday prices.
With that purpose, the loss leader strategy works by selling a couple of products and creating zero or even negative profit margins. This strategy is designed to make potential customers attracted to the low prices of a couple of products. When these customers are going back for more of the same products, the company can now persuade them to buy other products at a normal price. In short, this strategy works by getting your product at the door of the customers with low prices and comes back with other products at a normal price to start creating profit.
To have a better picture of how the loss leader strategy works, let us look at some examples. Many products such as milks, eggs, and other groceries are often used as loss leader pricing examples. However, let us take a look at razor. Razor is a good loss leader pricing example. Razor manufacturers, like Gillette, often do not make a profit from the sales of their unit; the handle and the razor. The production cost of the handle of the unit is often higher than the cost of the unit. However, razor manufacturers do not intend to make profits from their unit’s sales; they intend to make profits from their individual razor’s sales. By creating their unit as a loss leader product, a product sold at lower prices of its production cost, razor manufacturers can persuade and expect customers to regularly buy their individual razor.
As a pricing strategy, the loss leader strategy comes with its own pros and cons. You have seen how the loss leader works to create a customer base. Other than that, there are still many benefits that you can get from this strategy. However, this strategy also comes with its own weakness, especially if not applied properly. To get a better picture, let us look at the loss leader strategy’s pros and cons. Here are the pros of this strategy:
- The loss leader strategy is helpful and practical when a company wants to empty their old products and replace them with new ones.
- Customers can enjoy a product at low prices and save money
- It is practical to create a customer base as most customers are often concerned with costs.
- It helps a business to gain an advantage through a pricing strategy.
Here are the cons of the loss leader strategy:
- Customers might expect the price to always be relatively the same. Any changes, slight or big, can cause a change in customers’ behavior and impact the customer base.
- The company only makes profits when a customer is buying other products sold at normal prices. A customer can come and buy only the loss leader product.
- This strategy often requires a solid financial condition as a company usually has to burden its losses, often heavy, at the earlier phase of the loss leader strategy.
To conclude, the loss leader strategy allows businesses, especially the small ones, to penetrate the market, gain customers, and start making profits. However, you need to execute this strategy really well. Often, you need to burden heavy losses before your leader pricing strategy successfully creates a customer base for your business. You also need to think well about the initial price of your loss leader products as any changes in their prices can impact your customer base.
However, having a customer base is only the first step of creating a successful business. To level up your business, you need to have a brand. Having a good and solid brand can also help you to retain and grow your customer base.
One of the best ways to create a brand is by having a website. A website can communicate your products and/or services and act as a contact point for your customers if they have any inquiries. Other than that, you can use websites for other things such as opening a store, delivering daily news through a newsletter, etc.
The good news is that you do not need to have extensive knowledge about website building to have your own website. Today, many website builders offer an easy way to create a website at an affordable price. Strikingly is your best choice if you want a striking website for your business.
Strikingly offers many templates for your business’ website. You can easily edit and add features to the template that you choose. You can also browse templates by categories so that you can focus on your needs. If you want to find something that works, you can also browse collections of websites that other users create to find how people are building their websites.
Image taken from Strikingly website
Once you have the template that you want for your website, you can start creating your brand. The first step of creating a brand is deciding what story you would like to say to your customers. This story is the story of your business; its values, its beliefs, its ideology, and so on. Take your time to consider what kind of image you want your current and potential customers to have when they think about your product.
Once you have your brand, ready it is time to start adding features to your website. Usually, you can place your story in the About Us section of your website. This section usually utilizes text and images to tell the story of your brand. If you use images, make sure to optimize the image so you can get the best results. You can find out more about sections in our help center.
The great thing about having a website is that you do many things with it. In this case, you can start your own online store to help you sell products. You can do that by adding the online store section to your website and start selling your products. With Strikingly, you can easily add your product to your website. You can sell both digital and physical products at your online store. The total of products you can add to your online store is 300 (for Pro users).
Image taken from Strikingly product
To help your customers browse your catalog, you can categorize your product. You can easily add up to 30 categories for your product. You can always choose which product you are going to show in your online store. In relation to the loss leader strategy, you always want to show the loss product together with its complementary product to have a bigger chance to be bought together.
Once you have your products set-up nicely, you can start getting a payment system for your online store. With Strikingly, you can easily have a secure payment system without bothering yourself with technical issues. You can receive payment in many forms such as credit card, Google Pay, Alipay, and WeChat Pay. You can also accept payments in many currencies. Strikingly supports more than a hundred currency for your online store. If you do not find the payment method you want or your currency on the list, you can always set-up an offline payment for your online store.
Image taken from Strikingly product
Now, you know what the loss leader strategy is and how you can implement them to your business. The loss leader strategy works by selling a couple of your products cheaper than its own production cost to get customers interested. Once they are interested, you can start selling your other products at everyday prices and start making profits. You need to plan and execute this strategy well, as this strategy often needs solid financial support since you need to burden losses at the earlier phase. Other than pricing, you can also need a brand to maintain and grow your customer base. Having a brand can help make your customer interested in your product not solely on price, but also due to your product’s image and perception.
Are you ready to create a brand and grow your customer base? Create your brand today with Strikingly!