Leader pricing is a marketing strategy practiced by online and offline retailers where price is reduced on a product, preferably in high demand, sometimes at a loss to attract customers to the premises.
This is in the hope that these customers would purchase other products, possibly through cross-merchandising, that are sold at full price.
There is also psychology concept involved as if a customer was to buy something from a store, then there’s a high likelihood that he would be comfortable enough to purchase more.
Leader pricing strategics is also often known as loss leader pricing, and are most often observed in the supermarkets to bring foot traffic.
They purchase advertisements that promote products with huge price-cuts to bring consumers to their premises.
And since these target consumers have made their way to the physical store, they would very likely make their other weekly grocery purchases at the location out of convenience and making the most of their personal free time.
This marketing tactic is also often implemented by online retailers to bring eyeballs to their shopping portals. And sometimes, visitors has to purchase a minimum value in order to enjoy the hefty discounts.
This leads to other regular-priced items being purchased in order to increase the minimum purchase amount in the shopping cart.
Business risks
In order to price products low enough to have the most impact in attracting customers, products often have to be priced at levels with very low margin, and sometimes even at a loss.
This is because the main objective of such marketing tactics is to bring in patrons.
Companies that practice leader pricing therefore take on the risks of incurring losses if the visitors brought in from such tactics do not purchase other products with higher margins.
On top of this, if a retailer makes such promotions a regular event, then consumers might not purchase products they fully intend to purchase until promotions are run for them.
Failing to put such risks into perspective can lead to negative effects on sales in the long run.
This is why selling products at a loss to lure visitors can be a dangerous road to go on unless the retailer has a wide range of products and a big group of loyal customers.
On the other hand, branding might be an objective of a company when implementing loss leader pricing.
For example, a new product from a new brand might be doing a launch to get the word out there on their offerings.
By agreeing to sell at a loss, big box retailers might agree to feature their products in their marketing collateral. Thus, the business gets more exposure from the advertising of big retailers that tend to have a wide reach of audience.
The brand then get exposure. And it would be even better branding if the product or company is trying to brand themselves as selling very affordable products.
However, it must be noted that in real life, supermarkets and suppliers often share the costs of advertising.
Running highly discounted items can sometimes also help a business get back previous customers who had switched to a cheaper alternative competitor product.
Retailers who frequently market products at a loss needs to be careful of unknowingly being the arm of a company who is dumping products.
Leader pricing should not be confused with follow-the-leader pricing.
