Marketing Mix » Price Component (Loss Leader and Promotional Pricing)

What you'll learn this session

Study time: 30 minutes

The role of price within the marketing mix
Loss leader pricing strategy and its business applications
Promotional pricing techniques and their effectiveness
Real-world examples of both pricing strategies
How to evaluate when these strategies are appropriate to use

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Price as a Component of the Marketing Mix

Price is one of the four key elements of the marketing mix (the 4Ps: Product, Price, Place and Promotion). It's the only element that generates revenue - the other three components create costs. How a business sets its prices can make or break its success in the market.

Key Definitions:

Price: The amount of money customers pay to purchase a product or service.
Pricing strategy: The method a business uses to set its prices based on costs, competition and customer value perception.
Loss leader: A product sold at a loss to attract customers who will hopefully buy other profitable items.
Promotional pricing: Temporarily reducing prices to increase short-term sales.

Why Price Matters – The Numbers

Did you know that a 1% improvement in price can lead to an 11% increase in profits for some businesses? This makes pricing one of the most powerful levers for profitability. Getting your pricing strategy right is crucial!

Loss Leader Pricing Strategy

A loss leader is a product sold at a loss (below cost price) to attract customers to a store or website. The business hopes that once customers are there, they'll buy other products with higher profit margins.

📈 How Loss Leaders Work

The business deliberately loses money on specific products to:

Drive foot traffic to physical stores
Increase website visits
Build customer awareness
Encourage purchases of complementary products
Create customer loyalty

💡 When to Use Loss Leaders

Loss leaders work best when:

Customers are likely to buy multiple items
The store has high-margin products available
The product is something people need regularly
Competitors can't easily match the price
The business can absorb short-term losses

Real-World Examples of Loss Leaders

Many businesses use loss leaders as part of their pricing strategy:

🍱 Supermarkets

Tesco and Sainsbury's often sell milk, bread and bananas at extremely low prices. They know shoppers will come for these essentials and end up buying other groceries with higher profit margins.

📱 Mobile Phones

Phone companies often sell handsets at a loss when customers sign up for contracts. They make their profit back through monthly service fees over the contract period.

🎮 Gaming Consoles

Sony and Microsoft sometimes sell their PlayStation and Xbox consoles at or below cost. They make their money back on game sales, online subscriptions and accessories.

Case Study Focus: Gillette Razors

Gillette famously uses the "razor and blades" business model - a classic loss leader approach. They sell razor handles cheaply (sometimes at a loss) but make significant profits on the replacement blades that customers need to buy repeatedly. This strategy has helped Gillette dominate the shaving market for decades. The initial purchase creates a long-term customer who continues to generate revenue.

Advantages and Disadvantages of Loss Leaders

✅ Advantages

Attracts new customers to your business
Increases store traffic and website visits
Can help clear old stock
Creates a perception of good value
Can lead to impulse purchases of other items

❌ Disadvantages

Reduces profit margins in the short term
May attract "cherry pickers" who only buy the loss leaders
Can trigger price wars with competitors
May damage brand perception if overused
Illegal in some places if seen as predatory pricing

Promotional Pricing Strategy

Promotional pricing involves temporarily reducing the price of a product or service to stimulate demand. Unlike loss leaders, promotional prices don't necessarily go below cost - they're just lower than the regular price.

Common Types of Promotional Pricing

📅 Seasonal Discounts

Reducing prices during specific times of year, like summer sales, Black Friday, or end-of-season clearances. Clothing retailers often use this approach to clear inventory before new seasons.

💰 Special Event Pricing

Discounts tied to holidays, anniversaries, or special events. For example, a restaurant might offer discounted meals on its 10th anniversary or Valentine's Day specials.

🎁 BOGOF Offers

Buy-one-get-one-free (BOGOF) or similar offers (buy one get one half price). These are particularly effective for products with long shelf lives or services that can be used over time.

When to Use Promotional Pricing

Promotional pricing is particularly effective in these situations:

Launching a new product to encourage trial
Clearing excess or seasonal inventory
Responding to competitive pressure
During slow business periods to stimulate demand
Building customer loyalty through perceived value

Case Study Focus: Amazon Prime Day

Amazon created its own shopping holiday called "Prime Day" where it offers thousands of promotional prices exclusively to Prime members. This strategy not only boosts sales during a typically slow retail period (July) but also encourages customers to sign up for Prime memberships. In 2022, Amazon sold more than 300 million items during Prime Day, making it one of the company's biggest sales events of the year. This shows how promotional pricing can be used strategically to achieve multiple business objectives.

Advantages and Disadvantages of Promotional Pricing

✅ Advantages

Creates a sense of urgency to buy
Can quickly increase sales volume
Helps clear excess inventory
Attracts price-sensitive customers
Can be used to reward loyal customers

❌ Disadvantages

May reduce perceived value if overused
Customers might wait for promotions
Can start price wars with competitors
Temporary sales boost often followed by slump
May attract one-time buyers with no loyalty

Comparing Loss Leader and Promotional Pricing

While both strategies involve price reductions, they serve different purposes and work in different ways:

💰 Loss Leaders

Sold below cost price
Aim to drive traffic and additional purchases
Usually applied to specific, carefully chosen products
Often part of a long-term strategy
Success measured by overall basket value

💸 Promotional Pricing

Sold at reduced but usually still profitable prices
Aim to boost short-term sales
Can be applied to many products at once
Usually temporary or seasonal
Success measured by sales volume increase

Making the Right Choice for Your Business

When deciding between these pricing strategies, businesses need to consider:

Their overall marketing objectives
The competitive landscape
Their financial ability to absorb losses
Customer buying behaviour and expectations
The potential for long-term customer value

Exam Tip!

In your iGCSE Business exam, you might be asked to evaluate pricing strategies for a specific business scenario. Remember to consider both the advantages and disadvantages of each approach and explain why one might be more suitable than another in that particular context. Use real-world examples to support your answer!

🔒 Test Your Knowledge!