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In Marketing , a loss leader (also called a '''key value item''' in the United Kingdom) is a type of Pricing Strategy where an item is sold below cost in an effort to stimulate other, profitable sales. It is a kind of Sales Promotion . SALES OF OTHER ITEMS IN THE SAME VISIT One use of a loss leader is to draw analysis.Vindevogel B., Dirk Van den Poel, and Geert Wets (2005), "Why promotion strategies based on market basket analysis do not work?" . Expert Systems with Applications, 28 (3): 583-590. An example would be a Supermarket selling Sugar or Milk at less than cost to draw customers to that particular supermarket chain. When automobile dealerships use this practice, they usually offer at least one vehicle below cost and must disclose all of the features of the vehicle (including the VIN). If the loss leader vehicle has been sold, the salesperson has no choice but to try to sell another vehicle at regular price. If you are not the first person at the dealership when there is a "1 only at this price" vehicle for sale, do not expect that vehicle to be there if you show up at the end of the day. Loss leader vehicles are typically new vehicles and they are almost always base models that do not bring much profit to the dealership anyway. However, at the end of the month, provided sales have been good, the manufacturer will give the dealership bonus money. If the dealership is a certified dealership, e.g., Ford "Blue Oval Certified," part of their advertising funding will come directly from Ford. This bonus/ad money will often be used to pay for the loss of profits with the loss leader. Loss leaders help generate lots of foot traffic at vehicle dealerships. 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 this business model, in which safety razors were sold or even given away as loss leaders so that his company could profit by selling disposable razor blades. This practice is commonly used with Video Game Console makers that sell their console units at very low margins, or even at a loss, to achieve a higher market share. They rely on profits from software sales where the markups are considerably higher. They also receive profits from third party software companies for licensing fees. Microsoft has used this technique with the Xbox and Xbox 360 . Sony has done the same with the PlayStation 3 (PS3) and, to a lesser extent, with the PlayStation 2 and PSP . This also translates to higher prices that are charged for the games and for original console accessories such as game controllers. Furthermore, the price of a game developed for multiple platforms (for example, Xbox 360, PS3, and PC ) is typically the same across all of those platforms, even if one or more of the platforms is not actually a loss leader (in this example, the PC; however, Nintendo's Wii is also sold at profit, unlike its console brethrenhttp://www.gamasutra.com/php-bin/news_index.php?story=11103). Inkjet Printer s are also often sold to retail customers below their true value and could also be viewed as loss leaders. Some of the printers, especially the entry-level models, are sold at a loss-leading price which seems apparently affordable to most consumers, but they pay the regular price for ink cartridges and specialty papers supplied by the manufacturer. Dealers who normally use "fruitshop" style trading methods--stocking small quantities of a variety of products, cannot compete with loss leaders by negotiating to buy larger quantities of consumables at a lower price because they would still have to sell at a loss to be competitive. Loss leaders can be an important part of companies' marketing and sales strategies. 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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