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In Marketing , a loss leader is an item that is sold below cost in an effort to stimulate other profitable sales. It is a kind of Sales Promotion . There are several varieties of this profitable technique. SALES OF OTHER ITEMS IN THE SAME VISIT One use of a loss leader is to draw Customer s into a Store where they are likely to buy other goods. The vendor expects that the typical customer will purchase other items at the same time as the loss leader and that the profit made on these items will be such that an overall profit is generated for the vendor. An example would be a Supermarket selling Sugar or Milk at less than cost to draw customers to that particular supermarket chain. Wal-Mart uses some Toy s as a loss leader, leading to the potential demise of toy-only Competitor s like Toys "Я" Us and FAO Schwarz . (See Predatory Pricing .) Under some Jurisdiction s, this is considered Dumping and is Illegal . A related example is the practice by some auto repair shops of offering required inspections at loss-leading prices; if a problem is found preventing the inspection from being passed, they are then in a position to offer to fix it. Characteristics of loss leaders
SALES OF RELATED ITEMS OVER TIME This is also known as the Razor And Blades Business Model , referring to the most famous example. Razor handles are sold at a loss, but sales of disposable razor blades are very profitable. American businessman King Gillette famously invented the razor and blades business model, in which Safety Razor s were sold or even given away as loss leaders so that his company could profit by selling disposable Razor Blade s. This practice is commonly used with video game consoles. Here, the console is sold as a loss leader but the console developer makes a profit on licensing fees charged to game developers who wish to develop games for the console. This also translates to higher prices that are charged for the games and for original console accessories such as game controllers. It also is used with the way Inkjet Printer s are sold to retail customers. Again, the printers, especially the entry-level models, are sold at a loss-leading price which seems apparently affordable to most consumers, but they pay dearly for ink cartridges and specialty papers supplied by the manufacturer. This is augmented by clauses in the printer's warranty that use of cartridges not supplied by the manufacturer will void that warranty. Some manufacturers even use technological limitations so that the printer doesn't work if it is used with aftermarket cartridges. Similarly, some bars or concession stands will offer free or inexpensive popcorn, then sell drinks at high prices to customers made thirsty by the popcorn. In these situations, it can be harder for dealers who use "fruitshop"-style trading methods of purchasing to negotiate buying larger quantities of consumables at a lower price in order to sell them off cheaper. Loss leaders are an important part of companies' marketing and sales strategies. TEMPORARY PROMOTIONS Loss leaders can also be attempts to build a customer relationship. For example, a grand opening sale at a new store might lose money in hopes of creating customer interest and building customer loyalty. A new restaurant may serve larger or higher quality meals during its first couple of weeks of business than it plans on doing in the future. The high value meals act as loss leaders, creating a marketing Buzz . LOW MARGIN PRODUCTS Some products are sold at very low profit margins, generating only minimal profit for the company. The reasoning is the same as the reasoning behind loss leaders. Technically, these products are not loss leaders because they do not generate a loss. Examples of these include:
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