Sales Strategy

The Business of Loss Leaders: Why Retailers Sacrifice Short-Term Margins October 01, 2025 (0 comments)

New York, NY--A loss leader strategy sets product prices below cost to attract customers. The idea is that while the business loses money on the discounted item, it gains from additional sales and repeat purchases. As an Investopedia article notes, this model is common across both retail stores and e-commerce platforms.

[Image via iStockphoto.com]

Per the article, companies like Gillette and Microsoft have relied on it for years. Gillette sells razors at a low price, knowing that profits come from blade replacements. Microsoft's Xbox consoles were sold with slim margins, offset by revenue from games and subscriptions.

This tactic is also known as "penetration pricing," as it enables firms to break into new markets and secure customer loyalty.

How Retailers Apply the Strategy

According to the article, retailers often strategically place loss leaders to attract customers. Milk, for example, is usually at the back of grocery stores, so shoppers must pass higher-margin items before reaching it.

Online, introductory pricing works similarly: credit card issuers may start with low rates, or cable companies may offer initial discounts to attract sign-ups. These short-term losses aim to lock in long-term customers.

Risks and Drawbacks

The main risk, according to Investopedia, is "cherry picking"—customers buying only the discounted items without making any other purchases.

Smaller businesses are especially vulnerable because they cannot absorb losses as easily as large corporations can. Suppliers may also face pressure to cut their prices so that retailers can continue using this model.

Critics argue that loss leader pricing can be predatory, potentially pushing smaller competitors out of business. The article stresses that while it can secure market share, businesses must weigh whether the benefits outweigh the risks.

Relevance for Jewelry Retailers

For jewelry retailers, the loss leader strategy can be applied through promotions on popular entry-level items—such as silver jewelry, fashion-forward pieces, or discounted services like complimentary ring sizing.

The goal is not to make a profit on these specific offers, but to draw customers into the store or online shop, where they are more likely to purchase higher-margin items, such as engagement rings, luxury watches, or custom designs.

Learn more in the Investopedia article here.