Loss leader pricing is a marketing strategy where a business sells products below cost – at a loss. The goal of this is to attract customers and to increase the sales of other products. For example, Black Friday sales campaigns follow this strategy.
The term loss leader refers to the product that draws people’s attention with its low price. Typical loss leaders in supermarkets are for example milk and eggs. In most cases, the customers who buy such discounted items, also buy regular-priced products.
In car sales, new cars might also become loss leaders. They attract the most customers while their profit margins are the lowest. The dealerships can’t raise their prices much higher than the manufacturer’s set minimum retail price (MRSP). If they do so, the customers can easily find a better deal elsewhere. This means that selling only these new cars doesn’t generate much profit. That’s why a large part of the profit comes from additional products and services, such as parts and servicing the car.