Published by MBA Skool Team, Last Updated: August 10, 2021
What is Leader Pricing?
Leader pricing strategy is a type of Promotional Pricing in which the retailers or other small businesses set lowest prices for the products. This price typically is either set by making profit equal to zero or even negative. This is done to attract more customers to buy the product. It is also called as Loss leader pricing.
There is also a downside of using this pricing technique. If the product offered at the lowest price doesn’t sell as per the plan then the company further goes down on the loss as the amount sold was already at a lower price.
In many countries this pricing strategy is not legal as it creates a backlash with the suppliers and the distributors who offer other products at higher price. Hence they form lobbies against this low priced product and stop stocking it as it doesn’t give any profits to them and also creates a barrier for other products to be sold.
Different types of businesses use this pricing strategy for different purposes.
• Some companies use it to sell a new product. This saves on their marketing cost of acquiring new customers through some other mediums like advertisements.
• Some companies use this pricing to clear off their inventory. The lower price creates more demand and hence it becomes easier to sell these products in high volume.
• Retailers use this pricing strategy to attract more customers in their shops. But since they don’t want to make loss, they price some other product higher so as to compensate for the loss made by the loss leader priced product. Sometimes it also pays off when the high volume of sales compensates for the loss made by lowering the price.
Leader Pricing Example
Let us take an example of a new brand of shoes which normally sells at 40$ a pair and makes a profit of 5$ to the retailer. Now the sales are low and the retailer wants to attract more customers. Now there are many ways in terms of pricing which can be done. Either costs can be lowered so that price can be brought down but that may not be possible always. In leader pricing, the retailer may try to sell the shoes at 35$ making profit 0 to drive more customers to the store or even can go at 32$ to take a loss at each sale in return for increased customer base.
Hence, this concludes the definition of Leader Pricing along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
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