Loss leading has long been used by many global retailers as a strategy to boost sales inside the store and clear stocks. But is this a successful strategy or can it be detrimental to retailers (and to the industry in general) in the long term?
For many years, retailers have applied the loss leader pricing strategy – selling a product at a low price (at or below cost) – to stimulate other, profitable sales and clear the stock. Newly launched products are often priced low to attract trials. Experts, though, are divided on the benefits that a retailer can draw by applying this strategy.
Upbeat on the potential of loss leaders to boost the overall sales of a retailer, B V K Raju, partner, Q-Mart Enterprises, says, “Loss leader is a psychological tool to bring in customers and register higher sales. A time-tested and proven concept, it is an aggressive short-term strategy used in tandem with other strategies such as penetration pricing, competitive pricing, bundling, etc.” Being a niche store, Q-Mart Enterprises does not apply the loss leader strategy, but Raju says, “I believe it is a significant way to attract customers and boost sales.”
Some, however, believe the strategy is not sustainable in the long term and can only be good in the short term. “We do not believe in below- price selling (loss leading). Our pricing on KVIs (key value items) is extremely sharp and comparable to market prices. It is our endeavour to build value for our shoppers through differentiated merchandise, good deals, value-added offers, excellent customer service and a truly satisfying shopping experience,” says Sanjay Gupta, vice president, general merchandising and marketing, Spencer’s Retail Ltd.
Even if it’s a short-term strategy, loss leading can’t be overlooked. The benefits of this kind of pricing, however, do vary from retailer to retailer and from situation to situation. On the different ways the strategycan help a retailer, Siddharthan Sundaram, director, retailer services, The Nielsen Company, says, “Loss leader pricing can be used for many purposes – moving out overstocked items, so that the retailer can free up shelf space; creating brand awareness; increasing traffic, etc.”
He adds, “Nowadays, most modern retail stores sell vegetables and fruits at a lower price (compared to open market/wet market) and that attracts shoppers to visit these stores and buy other items too.”
The loss leader pricing strategy is also used extensively these days to promote newly launched products. Gupta says, “Manufacturers are free to provide value to shoppers in order to induce trial products for their new launches and they could bundle offers to do the same. From a retailer’s perspective, the participative discount offered by manufacturers could be used to encourage sales ofproducts that are in a declining stage of their life cycles or if a retailer has inventory that isn’t moving.”
He further says, “It can also be used if the retailer has overstocked a particular SKU. By cutting the price of such an item, backed by the manufacturer’s support, a retailer not only frees up the shelf space and reduces inventory, but also increases cash flow.”
Generally, products that are popular or used frequently and have an impact on the consumer psyche are chosen by retailers as loss leaders. According to Raju, there can be loss leaders within any category, but a few fresh vegetables (such as onions, potatoes and tomatoes) and staples (such as rice, oil and sugar) would be ideal loss leaders as these are popular grocery items.
When asked which offer – buyone- get-one or cross merchandising – attracts the consumer the most, Raju says that the effectiveness of an offer depends on the product that is going to be a loss leader. Gupta, however, believes an offer backed by the manufacturer’s support – buy-one-get-one – works best in this situation.
He also reierates that loss leading, if used carefully, is one of the most successful marketing strategies. “Vendor- funded programmes have run successfully in our stores from time to time. Typically, one sees a 25 percent rise in sales during meaningful interventions of this nature,” he adds.
The Risks Involved
Though loss leading can be a successful strategy, there are many risks involved in applying it. A retailer’s strategy can go wrong if shoppers start cherry picking – buying only loss leader items. “The risk is that we end up training shoppers to always look for bargains, and in a waferthin margin business such as retail this cannot hold even in a relatively longer term,” Gupta explains. Raju agrees that it is difficult to sustain the strategy in the long run and suggests that it should be carefully planned out. He says, “A pitfall with the loss leader strategy is that shoppers may take it as the real price and will resist paying more when you try to raise the price.”
He further says, “Another major pitfall is the risk of competitors or small retailers taking advantage of the pricing and picking up products in large quantities for sale in their
K Radhakrishnan, chief mentor, Aligned Business Partners, maintains that loss leading is not a successful strategy. “I don’t accept loss leader as a successful global strategy. It is a double-edged sword, which can be extremely detrimental to the company using it and to the industry in general.”
Asserting that the strategy can affect the position and reputation of the retailer, Radhakrishnan asks, “If a loss leader SKU sells in large numbers, how will the loss be compensated?”
On the changing trends and innovations made in the strategy, Radhakrishnan says, “I suspect the trends are not clear as it is not a standard strategy for any intelligent retailer. I would clearly advocate other sales and marketing strategies and not the loss leader strategy.”
Gupta believes that schemes centred on pushing volume buys seem to be the trend largely. Suggesting further innovation to strength the strategy, he says, “The industry must find ways to ensure a strong connect that goes beyond cherry picking by shoppers. The ultimate objective should be to get them (customers) to also buy other lines in the same visit so that we also sell profitable lines (higher margin items) that may otherwise not have been picked.”
Like most other strategies used by retailers to shore up sales and contain inventories, loss leading, too, has its pros and cons. And whether a retailer gains from using this kind of pricing or not depends on a number of other factors.
“Despite all the risks involved, loss leading, when used prudently and cautiously, works better than any other marketing strategy to boost sales inside the store,” Raju concludes.