What Is A Loss Leader Strategy And What Do You Need To Know?

Companies use loss leaders as a method of strategic cost setting for goods and services. A loss leader is simply a product or service that a company offers under cost in an effort to attract customers. The goal of the loss leader strategy is that the loss a company takes on the product or service will be offset by the increase in additional sales from profitable items. Whether you are an online retailer, a brick and mortar storefront or a service provider the loss leader strategy may be one way to garner additional traffic that will pay off in the long run. Magazine publishers have utilized this strategy very well. They offer free issues or a highly discounted rate for the initial year in hopes the subscriber will see the value of the product, and continue their subscription at a higher rate. There are differing opinions on whether loss leader strategies are successful, and each company must carefully consider their situation and legal ramifications before offering one.

Is It Legal?

In many states, the answer is in a gray area. Twenty-two states have laws in place banning the use of  loss leaders under  the General Sales Below-Cost (SBC) Laws. In the Midwest, Minnesota and Wisconsin are the only states with laws regarding loss leaders on the books, along with many southern and eastern states. The SBC laws look at the use of loss leader strategy as predatory. The idea being that the companies most commonly using the approach often have dominance in their area. They can lower costs for a period that is long enough to drive away competitors, and once achieved raise the prices to cover their losses leaving consumers with nowhere else to turn. The laws, enacted during the 1930’s and 1940’s, were created along with Antitrust Laws.

Is It Archaic?

Many say yes. Because, as critics explain, most of the laws were created when the majority of producers and suppliers were controlled by large holding companies. These holding companies would invest in businesses that relate to one another in an effort to control the market and manipulate pricing. The Antitrust Laws helped to reduce this problem and protect the free-market. Though many of the SBC laws were amended in the latter half of the 20th Century, some believe they should be removed completely.

Other Considerations

Implementing a loss leader strategy requires some diligent planning and research. Along with understanding the SBC laws in your state, you also need to make sure that your company can afford the loss and will likely recoup it. Also, important to remember is that you advertising must be done carefully as well. False or misleading advertising could be considered fraud, which opens the door to some serious exposure.

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