A loss leader consciously loses money on a product item, in order to either enter a market or to attract customers to another segment of the business (ancillary business). Therefore, if well executed, the losses are offset by the gains in selling ancillary products, or in gaining market shares. Thus, it might translate into a long-term advantage.
Glance at loss leadership
A loss leadership strategy can be used either as a go-to-market strategy.
Or as a way to enhance another part of the business, by attracting customers through a hook product, and having them also shop related products, where the company has higher margins.
Costo and its Food Court Combo as the “Hook Product”
Costco follows a sort of hybrid model (between retail and wholesale) where it does sell things in bulk, yet it sells them directly to consumers.
How does Costco do that?
With its hybrid model, Costco operates stores near urban areas, yet still in locations where it can host its warehouses. To attract people to its facilities, Costco uses a couple of hooks: low gas prices and its food court.
In short, Costco doesn’t care whether it makes money or not on the Food Court. Instead, the food court has two functions: first, offer a great experience to families that go there, thus creating an opportunity for them to make the trips at Costco. Second, by offering these deals at the food court, customers also leave with the feeling they have received great deals at Costco (a sort of halo effect).
How do you build a loss leader strategy?
The hook product: hooking them up
The first step is about finding a product item that can boost the customer experience, and that will be used as the entry touchpoint with the business. In short, think of the products or services you can offer that while losing money to the business, or perhaps carrying zero profits, will be critical to make the business known, to show its related offerings, and to make the overall customer experience well perceived.
The ancillary model
Once the hook product is in place, think of ways you can complement that with your main product line and service. Thus, creating and leveraging the hook product as the avenue into your main offering. Or to speed up the market adoption of a new product or service.
Let’s see some examples.
Over the years, Amazon has been criticized by many analysts for its lack of profitability. However, Amazon consciously gave up profits in the yearly years, so that it could speed up the growth of its e-commerce platform. By offering lower prices, it generated the traction to offer more and more categories (therefore customers could return to Amazon and buy more related items) and to also enhance other parts of its business.
Another interesting example in the tech world is Google Cloud, losing money (or at least not being much profitable) on the cloud to win the AI market.
Related Business Model Types
Attention Merchant Business Model
Connected Strategy Frameworks