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What Are Loss Leaders? Should Your Online Business Offer Them?

What are loss leaders?
Credit: William Potter/Shutterstock

Offering loss leaders is a time-tested strategy for brick-and-mortar retail establishments, but lots of e-commerce businesses offer them too. A loss leader is an item that's sold below cost to the retailer or business. Loss leaders are offered more as an incentive to shoppers as a way to encourage additional sales, but it can be tricky to toe the line between encouraging repeat customers and losing out on short-term profits. The best way to determine whether loss leaders are right for your online business is to consider all the options available and try a few different models to test the waters.   

In some cases, a loss leader is an inexpensive extra with broad appeal – something a customer can easily add on to their normal purchase, like what you might find at the counter of a pharmacy right by the cash register. Often, loss leaders are sample-size versions of more expensive products or inexpensive accessories.

Businesses also offer loss leaders through free samples and free or discounted trials. This type of strategy is especially common within subscription- or membership-based industries, like gyms and fitness studios. Service-based businesses also use this model, for example, by offering a free trial of the service upfront or by getting a service for free after spending a certain amount. Lawn care companies, spas, salons, and car washes are a few examples of businesses that use free samples and discounted trials.

Other companies offer loss leaders when they know the item being sold will bring in future purchases. For example, a fragrance company might sell an oil diffuser at cost with the expectation that customers will frequently purchase expensive refills.

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There are lots of ways businesses can offer loss leaders to their target customers. We spoke with several entrepreneurs in different industries to get their take on offering online loss leaders, and they had a lot to say.

Andi Gray is the president of Strategy Leaders Inc., a firm that offers consultancy services to small businesses. Gray told us that she believes in using a loss leader strategy to promote customer satisfaction and foster successful long-term partnerships.

"We offer our prospects the opportunity to get to know us by going through a free diagnostic process, which translates into up to 10 hours of free consulting," she said. "Why do we do it? Because we want raving fans. And we know that not every customer is a good customer."

Gray brings up a good point for service-based SMBs that rely on collaboration. Just because someone wants the services you offer doesn't mean they are an ideal fit.  

"We take prospects through a series of questions and meetings to discover if there's a fit for them and for us," Gray explained. "Along the way, we talk to lots of folks in a deliberate fashion, tell folks who aren't a fit where else they might want to look for help, and help our staff do an excellent job of qualifying prospects and converting the right ones into great clients."

Tim Trampedach is the CEO of Torqued, an e-commerce site that sells specialty motorsports parts, and he's well acquainted with the struggles small business owners face when it comes to offering loss leaders online. In the automotive parts industry, many products can only be sold at the minimum advertised price (MAP) that the manufacturer sets, which limits traditional loss leader options.

"This is great in many ways, because nobody can outdo the other on pricing to customers, but it essentially shifts the competition to cost and expenses," Trampedach explained. "We therefore don't have items which we sell at retail as loss leaders, in so much as we have items which we buy at worse terms mostly so that we can have them in store. These are our loss leaders, where we make less profit, but it creates a sale."

In addition to working around MAP limitations, Trampedach strategizes the products his store offers at narrower profits. He said he chooses parts in the under-$100 range that are also easy to ship, and avoids offering loss leaders that are bulky, require specialized packaging, or compete with other core products his company offers. His advice for setting loss leaders effectively is to set goals, which should include choosing loss leaders that will generate future sales on higher-margin or higher-priced items. He also recommends considering the larger long-term consequences of offering loss leaders.

"A sale means you generate a customer record," he said. "This will allow for marketing to that customer for potential future sales." He added that customers in his industry are sometimes wary of a new retailer, and that offering loss leaders is a way to generate a first-time order and demonstrate value to new customers. 

In brick-and-mortar stores, loss leaders are all about securing sales, but online retailers are often at the whims of search engine results. In addition to big-box stores with physical locations, small online businesses have to compete with e-commerce giants like Amazon, which means search engine optimization (SEO) matters.

Dylan Smith, the co-founder of SmokeSmith Gear, an online boutique that sells specialty smoking and vaporizing accessories, says he uses loss leaders to improve his site's SEO and drive more traffic to his business.

"In this day and age – in the realm of Amazon, Walmart and others – offering loss leaders is a necessity," he told Business News Daily. "It is very hard to get started and build traffic and a brand without offering loss leaders. But we look at this not as a cost but rather an investment."

Smith chooses loss leaders based on demand and SEO traffic. "We have certain items where the margin is nearly zero or where we actually lose money … [but] there is a customer expectation that these items and brands will be available. Not offering them would leave a gap in the product offering." Plus, since the types of items Smith offers at a narrow margin or a loss are highly searched for, his shop gains an SEO benefit just by offering such items, even if they are loss leaders.

Other online retailers with larger distribution chains may be able to make a profit on the same items that smaller retailers offer as loss leaders. However, as Smith pointed out, staying competitive requires offering products that customers are already searching for, not only for SEO purposes but for future sales.

Offering loss leaders is a great way for small e-commerce businesses to attract new customers, compete with larger companies and increase their online visibility. That said, no single approach works for every industry.

The best way to ensure your loss leader strategy is functional is to measure the results. Many SaaS products allow small business owners to track promotional and marketing campaigns and even pull reports on specific products or orders that contain specific products. Customer relationship management (CRM) systems are uniquely suited to do this, but you can also use standard accounting software to track sales and measure the efficiency of your loss leaders.

Mona Bushnell

Mona Bushnell is a New York City-based Staff Writer for Business.com and Business News Daily. She has a B.A. in Writing, Literature, and Publishing from Emerson College and has previously worked as an IT Technician, a Copywriter, a Software Administrator, a Scheduling Manager and an Editorial Writer. Mona began freelance writing full-time in 2014 and joined the Business.com team in 2017.

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