Price, product, promotion and place (4Ps): loss leader

The idea

A loss leader is a product sold below its cost price to attract customers into a shop or onto a website, where they are expected to buy other, more profitable items. It belongs to the price element of the marketing mix (the 4Ps). The business accepts a financial loss on the leader because overall revenue and profit should rise from the extra purchases. Supermarkets often use staple goods such as milk or bread this way on an ongoing basis, and online retailers may discount a games console to sell games and accessories. Success depends on customers buying enough full-price products, on the loss per unit being affordable, and on the tactic not damaging the brand's image.

What earns the marks

• Defines a loss leader as a product priced below its cost price to attract customers.
• Explains the purpose: to increase footfall or website traffic so customers buy other profitable products.
• Shows how the business judges success: extra revenue and profit from linked purchases must outweigh the loss made on the leader.
• Analyses the risk that customers buy only the loss leader, so the business makes a loss without gaining extra sales.
• Links the tactic to the wider marketing mix, for example prominent promotion or place decisions such as placing the leader at the back of a store.
• Applies the concept to a given business context, using the product and figures provided in the case.

Common mistakes and how to put them right

• Saying the business makes a profit on the loss leader itself.

  Put it right: The leader is sold below cost, meaning it generates a loss; profit comes from other products bought at the same time.

• Confusing a loss leader with a clearance sale.

  Put it right: A loss leader is a deliberate tactic to attract custom and stimulate other sales, whereas a clearance sale simply aims to remove old stock.

• Assuming a loss leader always succeeds.

  Put it right: It fails if customers buy only the leader, so the extra profit from other items must exceed the loss incurred.

Exam tips

• State clearly that the leader is sold below cost and explain where the profit actually comes from.
• Use the case study's products and figures to show whether the tactic is likely to work.
• Build a chain of reasoning: low price attracts customers, they buy other items, total revenue and profit may rise.