Have you used the Loss Leader strategy?

If you don’t know what a Loss leader is then feel free to read the [URL=“http://en.wikipedia.org/wiki/Loss_leader”]wiki. But have you ever used the strategy with your own business? Has it worked for you? What percentage of a loss did you view as okay to lose? Do you ever make up the money in the end?

It can sometimes be a gamble.

I have never done it but if done right can work wonders but if done wrong can cost you money.

A loss leader isn’t very different than running in ad, in that you are simply paying for a desired benefit in lost revenue rather than in cash.

So, if you determine that a new client is worth paying $1000 to acquire, you might base an ad campaign based on the idea that spending $25k in advertising would result in at least 25 new clients which would be worthwhile.

You can take the identical mentality when offering products/services at a loss. Say you offered a free service/product that cost you $25k in expenses (i.e. the actual amount of money SPENT to provide those products/services, not the actual value of those services) but you wound up with 35 new customers. That could actually be a much better investment into new business as the example in the previous paragraph.

The trick is to find a product/service that you can offer a low/loss rate and still expect the desired sale or new client acquisition to occur. It’s certainly a popular and effective way to promote business when done correctly.

I didn’t understand your question ‘what percent of a loss’ is OK. It’s not really about how much the discount is - it’s more about the actual dollar amount that you are spending to make those loss leader sales happen. The percent doesn’t really matter. You want to know how much money you are spending in promotions so that you can decide if it’s worthwhile.

Are you talking about selling physical products in a retail or ecommerce store or selling web design or other services to businesses?

Like Sagewing said, the percent doesn’t really matter, but you need to know your numbers and how much it currently costs you to get new clients so you can test and see if offering products or services below cost makes sense for you.

products or services

The point is not losing a little money. Loss leaders can, if done incorrectly, lead to devaluing your core service or product. And attraction of disloyal bargain hunters who see you as a commodity to be had at the lowest price possible.

Not to mention alienation of actual customers who didn’t get the lowered price.

Consequently, do not use your core service or product as a loss leader. You offer something which naturally leads into or complements your core service or product. So a bar offers pretzels and potato chips as a loss leader …not beer or whiskey.

Be especially watchful that you attract real customers, not consumers who show zero loyalty and show even less respect for your expertise.

This is at odds with the internet wisdom of devs and designers offering web dev or logo design services as Fiverr fodder.

A loss leader product has been the main driver of customer acquisition in one of my websites for the past 5-6 years. It’s the product I use most in advertising because it attracts clicks so well, and some percentage of the new customers stick around and buy more. That particular business already focuses on low prices, so the strategy of offering something below cost to attract people looking for a bargain is a good fit.