A loss leader product can best be described as a pricing strategy which sells slow-moving or unprofitable items at below market price in the hopes that those new customers will make up for the loss by purchasing additional items from you in the future.
Experienced eCommerce or drop-shipping business owners utilizing the loss leader selling strategy will always have profitable back-end sales and nurturing process. This usually consists of leveraging re-marketing ads and email marketing automation campaigns. Doing so allow them to take losses on products upfront on many products because they know the likelihood of having those customers buy again is usually 9 times higher than the 1st time buyer! Yes, nine times, that’s huge.
It might seem like a risky gamble; but it’s nothing new. Both major box retailers and small dropship retail stores have been operating on the loss leader principles for well over twenty to sixty years, and with astounding success. After all, there is virtually no consumer who won’t admit to hunting for the best bargain.
But it’s not just slow-selling items that can benefit from the loss leader strategy. It can also be used to reduce inventory (in cases of excess stock) or drive new customer retention.
An excellent example is Amazon Prime Day. While technically a loss leader, in 2017 the 36 hour promotional period wound up generating a reported $1.6 billion in revenue for the online retailer—and ultimately added an entirely new client base in addition to the estimated 100 million existing Amazon Prime customers.
But you don’t need to be Jeff Bezos to reap the benefits of loss leader pricing strategies. Here are three surprisingly simple ways you can use it to help boost your sales.
1. Introductory Pricing
Probably the most pertinent example of the loss leader strategy is used with new customer promotions offered by credit card companies and cell phone providers. By offering low interest rates and introductory discounts for new customers, companies are ensured of return business; even as rates and prices steadily increase. This not only attracts a new customer pool, but also helps maintain brand loyalty.
Black Friday is, in many ways, the bête noire of many retail employees; both online and brick and mortar. For the physical retailer, it can mean unruly lines and a need for additional staff to keep up with the demand.
For the online retailer, it can mean a limited stock of available inventory and increased competition. Both of which can actually be good for business.
If you have a limited item in stock, the chances are actually significantly greater that customers will continue to shop for both accessible inventory as well as items on sale.
Very few retailers actually lose money on doorbuster deals for the simple fact that most consumers prefer the convenience of “one stop shopping” (which is one of the reasons why many traditionally brick and mortar retailers are choosing to develop a robust e-commerce platform.) This is also why it’s easier for retailers to make a profit during competitive sales seasons; even for items that are priced at a loss. The low priced items simply incentivize people to buy more.
This same loss leader strategy can be easily implement in your dropship store as well. Simply sell a product that is very popular among your audience at a huge discount. As they check out on your site offer up-sells. And then after they buy send them special emails and re-marketing ads to help them more precisely with solving their frustrations and/or aspirations with products and services you can make a great profit off of.
3. New Merchant Awareness
For the first time retailer, delving into a new market feet first is always a somewhat scary proposition. You’re faced with uncertainty. You have no idea when—or even if—you’re going to turn a profit and you frankly have no idea what you’re in for unless you reduce risk by market and competitor research and analysis.
You are not alone.
At this early stage of business building your focus should be on maintaining brand awareness and reputation. And one of those powerful strategies is leverage the loss leader strategy. Whether it’s an online giant like Amazon or your local muffler shop, people simply can’t resist a good deal.
It’s more than just financial comfort; it’s the psychological comfort and security of knowing you, as the customer, got the best price available; even for a product or service you don’t particularly need per se. And knowing that purchase gives your new customer a sense of comfort and security, they will now be 9 times more likely to be a repeat customers to you in the near future.
At the end of the day, loss leader pricing is not a fail safe solution to generate sales. There’s always going to be the sort of consumer who simply “cherry picks” from various retailers for the best possible price or value; and that is simply its greatest disadvantage.
But loss leaders aren’t necessarily just about shifting inventory and pricing. They’re also about brand awareness, advertising and reaching the right customer at exactly the right time. Which, in the long run, is worth a lot more than a little diminished returns up front when building your dropship or ecommerce business.