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Organized retailer’s big advantage over small stores- Loss leader strategy
Submitted by admin on Tue, 12/23/2008 - 16:43.
Before going to explain first part of article title which is “organized retailer’s big….”, it’s perhaps good to start with explaining what is loss leader strategy, then move to first part.
A loss leader is a product sold at a low price (at cost or below cost) to attract customer, so that along with this product, customers also picks many other profitable items. For Example, retailers of your city can give you heavy discount on fruits (say, on mangoes), but when you visit the store, most probably, you will also pick up other fruits and vegetables, cakes etc. which are without any discounts and bears high margin for retailer. So even, retailer have sold mangoes with very low profit margin or even at loss, but through this discount, it increased foot fall of customers in store, and made net profit on total sale to the customer.
It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. The price can even be so low that the product is sold at a loss.
Now, I hope that readers are very clear in understanding loss leader. So loss leader is not retailer, some products which are sold at “low or no” margins or even at loss, but simulate customers to purchase many other products with good profit margin, so finally retailer makes good money, not loss.
Before getting more in retailing related loss leader strategy, let’s jog in some simple examples.
The razor and blades business model is similar to the loss leader business model. If you are going to purchase Mach 3 razor handle, they are given away at low margin, but sales of disposable razor blades are very profitable (one mach 3 blade is priced around Rs. 110 /$ 2.3).
Similarly, model can be seen while some mobile service providers give mobile phone along with new connection (these phones are lock for particular service providers only) at sub thousand price, which is essential comes under loss leader, as profit comes from call services.
In most of the case, seller has to wait to reap profit after locking customer. This wait period time can be days, weeks, months or even years. For example, banks provide credit card to students, so that after some years they will become profitable to bank when will start earning.