Product Loss Leaders

Product loss leaders—also called “loss leaders” or simply “leaders”—are items that manufacturers or retailers sell at or below cost to consumers or business customers. Manufacturers often use the strategy of product loss leaders when trying to penetrate the market with a new technology that could significantly shift customers' buying or usage habits. Furthermore, manufacturers that make accessories or components or that provide postsale service for a loss leader often rely on sales of these ancillary goods to generate profits. IBM used this strategy in 1999 when it switched its distribution of desktop computers to an online-only option. David Thomas, head of IBM's personal computer (PC) systems group, noted that he expected to make only about three cents per dollar in profit for each desktop PC sold. However, he expected that sales of related goods, such as “services, software, financing and other extras … would add a further 50 cents in revenue and nine cents in profit” (Hansell 1999, C20). Similarly, in 2009, Microsoft priced the Xbox 360 such that the firm was losing around $150 on each gaming system it sold. However, the company anticipates that increased demand should reduce manufacturing costs and that it will also generate a highly profitable revenue stream from royalties received from game publishers (Keating 2009).

Major firms in a particular industry might also agree to adopt a loss-leader strategy to spur the phaseout of products or services and encourage the adoption of innovations. A recent example involved firms that agreed to heavily discount radio frequency identification (RFID) technology, which assigns a unique identifying number to an item by using radio signals and is attempting to supplant other identifier technologies, such as scanners and magnetic credit card strips. Furthermore, the recording industry as a whole prices CDs as loss leaders in the hopes of spurring interest in particular recording artists and then recouping profits on more lucrative offerings such as concert ticket sales.

Three promotional activities—loss leaders, in-store specials, and double couponing—account for almost 100 percent of the price-based promotional strategies used by supermarkets (Walters and MacKenzie [Page 1152]1988). Retailers use loss leaders to try to build store traffic and attract new and existing customers, especially during times of high-volume purchasing. For example, one loss-leader strategy that grocery retailers often employ is drastically discounting the price of turkeys during the Thanksgiving season. Retailers assume that consumers who buy turkeys are likely to cook a large holiday dinner and will need to buy the many necessary ingredients for that meal. So retailers offer this particular product as a loss leader to entice more high-profit, seasonally oriented customers into their stores.

Loss leaders often figure prominently in retail advertisements. Advertisers often use the terms featured items or features to signal to consumers that retailers have earmarked specific items as loss leaders. Typically, retailers offer only a particular loss leader for a limited amount of time because this tactic is designed to create a sense of urgency in consumers and because retailers typically do not want to incur losses on the same item over a prolonged period. Furthermore, in 1971, the Federal Trade Commission ruled that retailers were not allowed to advertise sale items unless they could stock them in sufficient quantities to meet demand. Although stores can offer consumers “rain checks” if they run out of stock during any specific promotion, the retailer is supposed to anticipate the increased demand for these products and have them in stock, so as not to upset customers.

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