Startling facts about loss leader business strategy, you haven’t known yet

Companies have got lot of hat tricks. One such hack is loss leader pricing adopted as business strategy. On appearance nothing wrong in this strategy; it is legitimate but it takes out the level field competition in a market. You will be startled to learn about loss leader business strategy as shown below:

This strategy is basically of competitive as well as cut-throat nature. Firm sells it product below the prevailing market price and in some cases below the cost of production. Is it a saner action? In the business calculus it is. Any loss incurred is recouped from the sale proceeds of associated or allied products.

In an existing market the pricing method stimulates sale of the loss leader item along with exponential sale of related items. For example, printers are often sold at sub-prices whereas range of cartridges required to be used therein are marketed at premium prices.

In new market loss leader product such as game console is introduced with a big bang and at much cheaper price to up-build customer base at faster phase. However the videogames that are to be played in that console are sold at exorbitant prices.

It takes a different turn in a captive market where the dominant player attempts to force out its nearest competitors who use no-price differentiation. Another turn of event is when established firms gang up against the arrival of a new entrant in the market with similar or improved product.

Companies that resort to loss leader strategy are generally found in large or multinational concerns. Supermarkets use loss leader business strategy to promote customer loyalty and to increase purchases of other products on the display, by customers visiting their stalls. In some cases certain products are given free as promotional pieces to stimulate momentous buying of visitors.

Reaction to loss leader pricing is mostly negative from firms that are competing in the market with the same product line. Small business treats this as predatory practice. Buyers have mixed feeling when faced with loss leader products. On the positive side some consider it is a good thing while on the negative side they feel either the product is of low quality or the firm producing it is in some kind of distress.

In the supply chain, partners who supply raw materials for the product feel the pinch when the firm asks them to reduce purchase quotes. Similarly in the demand chain, distributors, wholesalers and retailers are strained when their commission or margin is drastically reduced.

Cheers!

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail:   cosmicgems@gmail.com

Blog:   Business Strategist