Loss leaders are a marketing strategy, used in many retail businesses, especially in grocery stores. A loss leader is an item that is sold at such a low price it actually loses money. The price is lower than the actual cost the retailer paid for the item. Two typically identified loss leaders at the grocery store are milk and eggs, but many items are used as loss leaders all the time, while certain items go on sales at various times. The store hopes that these low-priced items will entice customers to the store, where they will also buy plenty of regular priced items.
Many people will tell you that the reason the milk and eggs are at the very back corner of the store is because you have to walk through the rest of the store to get to them, and along the way you might pick up other items on which the store makes a greater profit. This makes sense, as milk and eggs are considered two essential items by most Americans. Milk is so important to us that we use the term ‘milk-run’ not only to mean running to the store to purchase milk but any short and easy but essential errand. Often, loss leaders are featured in end-of-aisle displays.
Purpose of Loss Leaders
The basic purpose of loss leaders is to attract traffic to the store. Therefore, different items might be used as loss leaders at different times of the year. During the Thanksgiving holiday season, for example. grocery stores typically offer turkeys at drastically discounted prices. The turkey prices are meant to draw customers into the store where they will hopefully by all the other ingredients they need for their Thanksgiving or Christmas dinner. Typical loss leaders you might find any time of year are meat, poultry, bread, soft drinks, cereal, and chips.
The grocery store sales circulars typically feature a number of loss leaders. Items that are perishable, so they are not as easy to stock up on are often preferred, and will only be on sale for a short period of time, to create a sense of urgency.
However, in 1971, the Federal Trade Commission ruled that retailers could not advertise sale items unless they were able to stock enough of the item to meet the increased demand. Although ‘rain checks’ can be given to customers if sales items run out, the retailer is required to make every effort to have enough in stock.
Couponers and other people looking to save money often take advantage of their knowledge of loss leaders by following the sales advertisements and only buying those items, and no other items, from a particular store. The idea is not to be ‘fooled’ into buying regular priced items, unless they too can be purchased at a discount, such as by using coupons, or doubling them. This requires very careful planning and traveling to several stores in order to buy basic foodstuffs. These customers may believe that all the other items in the store, besides the loss leaders, are marked up extremely high. Ironically, some retailers think that the reduced priced items create the perception that all the store’s prices are low.
The loss leader strategy may seem extremely simple but it is anything but. There is no guarantee that the store will make more money by losing money on certain items. Procedures for tracking purchases must be used and it is possible for low prices to backfire. Customers are often wary of prices that seem too low and they may think this signals inferior quality, out-of-date, or damaged items. As well, some manufacturers may not allow the store to prices its goods to low, for various reasons, such a not having one retailer undercut another strong retailer, and to control the perception of a brand across stores. Although it is illegal for a manufacturer and a retailer to make an agreement on minimum pricing, it is legal for a manufacturer to demand that retailers follow its list pricing.
Some states have laws that prohibit pricing items too low, so that loss leaders cannot be used. In these cases, a modified version is used called leader pricing, where an item is sold only slightly above cost. Many major grocery store chains and large retailers like Walmart and Kmart use this strategy.
The use of loss leaders is a very old retail practice and the ethics of this strategy have long been debated. It is often considered predatory pricing, harmful to consumers and to retailers. For consumers, it is often considered a ‘cheap trick’ and for retailers, it is considered price undercutting. However, most regulatory bodies do not consider loss leaders predatory, as the practice is limited to only a few items that frequently change. As well, the general opinion is that they are beneficial to the consumer.
Is Other Merchandize Marked Up Higher?
Those who purchase only loss leaders often believe that the other merchandise in the store is marked up ridiculously high. The loss leaders are there to lure you in, and you are then tricked into purchasing other items at inflated prices. In reality, the main tactic of loss-leaders is generating higher customer traffic and volume purchasing. Although the store may lose money on the loss leaders, they hope to make this up and generate sizeable profits from the volume of sales of other items. Different types of merchandise have different markups, related to customer expectations. Some high-margin items, such as toiletries and cosmetics, can help offset the loss and lead to overall profit. Service areas like bakeries, deli counters, seafood counters, etc. are also high-profit areas.
Using Loss Leaders to Save Money
Some shoppers use a cherry picking strategy to save money. They purposely find and buy only on sale loss leaders and nothing else. They will shop at several stores in order to find the items they need. Together with couponing, it is possible to save a great deal of money this way, but it is a lot of work! There are many websites dedicated to money-saving strategies and couponing. One website which can help you ‘cherry pick’ is My Grocery Deals. You can find deals in stores near you, set your preferred stores, and generate lists of on sale items for each store, complete with a total price. You can search for individual items on sale or simply watch for sales at a particular store. Although you still may have to shop at more than one store, the site saves a lot of time. Manufacturer coupons will also appear as your browse sale items.