How to Utilize a Loss Leader from a Merchandise Supplier

A loss leader is a well-known tool among big time merchandisers, but many new small businesses are getting into the merchandising game, and they may not know how to utilize this concept. Merchandising simply means any process that involves selling products to consumers, so even online shops are a part of merchandising. All stores have a merchandise supplier that sets costs. The store purchases these supplies, and then either modifies the supplies in some way or just turns around and sells it at a higher price. The difference between the cost of supplies and the price at which they're sold is referred to a profit margin, and in most cases that margin should be positive.

However, a loss leader is the exception to the rule. A loss leader is a product that is sold “at cost” or even for a lower price than it was received from the merchandise supplier. A merchandiser isn't going to make money on this product alone, but it can still lead to greater sales overall.

The first step in utilizing a loss leader is to choose a product. This product could be anything, but the product has to be desirable enough that when sold at a very low price, customers will be drawn in. The next step is to set the price at or below the cost, and be sure to advertise this price as effectively as possible.

So how does this contribute to a successful business strategy? There are a couple of ways. First, it is an effective marketing tool as it pulls in customers to a store that they might not visit otherwise. Many of these customers won't only purchase the loss leader, but will purchase other merchandise as well. Even though you're breaking even or losing money on the loss leader itself, the boost in the sales of other merchandise more than makes up for it.

The second potential benefit of a loss leader is that it familiarizes customers with a certain product or company. For example, razor blades that use disposable razors are often given out for free or sold at a loss. The money lost upfront is recovered, however, as the sale of the actual disposable razor blades is extremely profitable. For new stores, loss leaders are more about familiarizing customers with their brand and establishing their name.

So if a business is struggling to get sales, marking down a price from a merchandise supplier is sometimes an effective way to jump-start business.