What is Loss Leader Pricing? A Guide To How It Works

Loss leader pricing is when businesses deliberately sell a product at a very low price, sometimes even at a loss, to attract customers and boost overall sales. While it might sound counterintuitive, this tactic can be a powerful part of a smart pricing or marketing strategy.

The goal isn’t to make a profit on the discounted item itself but to bring people in, introduce them to your brand, and encourage them to spend more once they’re through the door (or on your site). It’s a common approach that both small and big-name brands use to build loyalty, drive traffic, and outshine the competition.

In this article, we’ll break down how loss leader pricing works, why it influences customer behavior, and when it makes sense to use it. We’ll also look at real-world examples, pros and cons, and how to decide whether loss leader pricing is the right move for your business.

What is loss leader pricing?

Loss leader pricing is a business strategy where a business sells a product at a price below its market cost to attract customers. This approach aims to draw in buyers who will then purchase additional, higher-margin items. For example, supermarkets often use loss leader pricing on staple items like milk and bread to increase overall store traffic.

What is the purpose of loss leader pricing?

Offering a popular item at an irresistible price can attract potential customers. They walk through your (real or virtual) door for the amazing deal, but once they’re there, they could end up buying more. 

This approach taps into a few psychological triggers. First, it builds a sense of urgency. Nobody wants to miss out on a bargain. It also creates a feeling of goodwill: Shoppers feel like they’re getting a fantastic deal, which can make them more open to spending a little more overall. Plus, once people are already shopping, they’re more likely to keep going.

Loss leader pricing can play a big role in a brand’s overall marketing and sales strategy. It can:

• Increase foot traffic (online or offline)
• Introduce customers to your brand or new product lines
• Improve customer loyalty by delivering great value
• Help clear out inventory that might otherwise sit unsold
• Make price optimization and dynamic pricing easier 

Loss leader vs. predatory pricing

At first glance, loss leader pricing and predatory pricing can look similar. Both involve selling products at super low prices, sometimes even below cost. But they’re actually separate pricing strategies with different goals (and legal implications).

Loss leader pricing is about attracting customers in a genuine, above-board way. 

Businesses offer a popular product at a low price to get people through the door (or onto their website), with the hope that those customers will stick around and buy other things, too. It’s a legal, widely used marketing tactic to build traffic, boost brand awareness, and increase overall sales in a win-win way for both businesses and shoppers.

Predatory pricing, on the other hand, is slightly murkier. 

This is when a company deliberately slashes prices, often across a whole range of products, not just to attract customers, but to drive competitors out of business. Once the business wipes out its competition, it can hike prices back up, because it’s the only option left. Predatory pricing is illegal in many places because it’s anti-competitive and harms the market in the long run.

Here’s a quick breakdown of the two: 

Real world loss leader pricing examples

• Supermarkets
• Gillette
• Microsoft

Businesses can use a loss leader strategy to attract customers and gain market share using numerous methods across a range of industries. Here are some common loss leader examples: 

Supermarkets

Grocery stores often use milk as a loss leader, in part because most supermarkets stock milk in refrigerated units in the very back of the store. Even if milk isn’t sold at a loss, enticing shoppers into the store to buy milk is likely to increase sales of other products through retail psychology as customers walk back through the aisles to the registers.

Gillette 

Gillette is a classic example of loss leader pricing in action. The company sells its razors at a super low price (sometimes even at a loss) because it knows where the real profits come from: the replacement blades. Once someone buys a Gillette razor, they’ll need to keep buying those specific blades, and that’s where Gillette makes its money, through higher profit margins.

Microsoft 

Microsoft has used loss leader pricing in clever ways over the years. One example is the Xbox. Microsoft has often sold Xbox consoles at little to no profit because the real money comes later through game sales, Xbox Live subscriptions, and digital downloads.

By getting the console into as many homes as possible with an attractive price tag, Microsoft builds a loyal customer base that keeps spending over time. It’s a smart long-game move: Take a small hit upfront to create a steady, profitable stream of future sales.

How to use loss leader pricing in your business

• New brands
• Holiday deals
• Excess inventory
• Consumables and replacement parts
• Cart or product page recommendations
• Business analytics

While loss leader pricing is more common in retail settings, it can also be effective for an online store or ecommerce business. Here are some ideas for using a loss leader pricing strategy in your business: 

New brands

For new ecommerce brands (or established companies introducing a new product or service), a loss leader pricing strategy can be effective in establishing a foothold in a crowded marketplace. This tactic, also known as penetration pricing, often takes place over a long initial period then tapers off as a brand grows its customer base.

Holiday deals

Think about all the deals retailers offer on Black Friday, the day after Thanksgiving in the US. Starting at dawn (and even earlier at some stores), retailers will promote products they’re selling at a fraction of their market price as a reason for consumers to shop there instead of with a competitor.

Excess inventory

If you’ve overestimated demand for a product, consider reducing it to market cost or below and using it as a loss leader. This will allow you to liquidate inventory that would otherwise gather dust in your warehouse, all while potentially boosting sales of other products.

Consumables and replacement parts

Consider products like razors and dusters. Brands like Gillette and Swiffer sell their devices at a loss because they can set a higher profit margin for repeat purchases of replacement blades and duster heads. If your products have replaceable or disposable parts, consider incorporating loss leader pricing into your business strategy.

Cart or product page recommendations

Just like the milk at the back of the grocery store, you can use your loss leader to drum up additional sales of other items in your store by recommending complementary or relevant products to shoppers at the right time.

Business analytics

Loss leader pricing can boost customer activity around your website and ad campaigns, giving you valuable insight into the reach and effectiveness of your marketing efforts. By advertising a loss leader product through a sale or coupon, you can track a range of customer actions, helping you justify your marketing expenses with hard data.

Advantages of loss leader pricing

• Increases store traffic
• Boosts sales
• Showcases other products
• Offers a competitive edge
• Clears inventory
• Enhances customer loyalty

Loss leader pricing can be a boon to your business. Here are a few reasons why: 

Increases store traffic 

One of the biggest perks of loss leader pricing is that it gets people in the door. A great deal grabs attention and encourages shoppers to check out what else you have to offer. More traffic means more chances to make sales—and more chances to turn casual browsers into loyal customers.

Boosts sales

Once people show up for the deal, they often buy other things, too, especially if you’ve got other products that complement the loss leader. Even if the original item isn’t profitable, the extra purchases can help balance things out and can lead to a big boost in overall sales.

Showcases other products

Loss leader pricing can be a brilliant way to introduce customers to the rest of your product range. Maybe they come in for the low-priced item, but while browsing, they discover new favorites they wouldn’t have considered otherwise. It’s a smart way to shine a spotlight on your bestsellers or newer launches.

Offers a competitive edge

In a crowded market, offering a must-have product at a can’t-miss price can set you apart from competitors. It gives shoppers a reason to pick you over someone else, and, once they’re familiar with your brand and your service, they’re more likely to come back even when the prices aren’t quite as jaw-dropping.

Clears inventory

Loss leader pricing is a clever way to move any stock that’s gathering dust. Offering a slow-moving or seasonal item at a steep discount can help free up space (and cash) for newer products without resorting to a full-blown clearance sale.

Enhances customer loyalty

Customers love getting a good deal. When you make them feel like they’re getting value for their money, they’re more likely to come back. A well-executed loss leader strategy can turn first-time buyers into loyal fans who keep shopping with you long after the initial purchase.

Disadvantages of loss leader pricing

• Reduced profit margin
• Risk of attracting cherry pickers
• Potential damage to brand image
• Price war potential
• Limited applicability
• Regulatory risks

While loss leader pricing can prove beneficial to your business and customers, it also has some drawbacks, including: 

Reduced profit margin

The obvious downside is you’re selling something for less than it’s worth, sometimes even at a loss. If you don’t have a solid plan to make up that revenue elsewhere, it can hurt your overall profitability, especially if too many people only grab the discounted item and nothing else.

Risk of attracting cherry pickers

Not all customers will stick around to buy more. Some will swoop in, grab the bargain, and leave without spending an extra penny. If too many cherry-pickers take advantage of your loss leader deal, it can undermine the whole strategy and leave you with a lot of sales but not a lot of profit.

Potential damage to brand image

If you’re not careful, constantly offering super-low prices can affect your brand image. It might attract bargain hunters but scare off customers who are willing to pay for quality. 

Price war potential

If competitors catch wind of your aggressive pricing, it could trigger a price war where everyone keeps undercutting each other just to stay relevant. That’s a tough battle to win, and it usually ends up hurting everyone’s bottom line in the long run.

Limited applicability

Loss leader pricing works best when you have a strong product lineup or recurring revenue model (like razor blades, game subscriptions, or printer ink). If you’re selling one-off products without a natural follow-up purchase, it’s harder to make the numbers work in your favor.

Regulatory risks

In some industries and regions, aggressive discounting strategies can trigger legal scrutiny. Predatory pricing—intentionally undercutting competitors to drive them out of business—is illegal in many places. Even if you’re playing fair, it’s important to know the rules and stay on the right side of regulations.