What’s a Loss Leader (or Cost Leader)

April 9th, 2008

Loss LeaderThis conversation actually occurred a few weeks ago when I was at my “bat cave” location internationally with our designer where he had just come back from learning about a concept called loss leader or cost leader (same thing). He was pretty excited, I was a bit surprised because it was so common in U.S.

However, I gave it more thought and realized that I have been born into an industry that it’s common in, but that many out there may not understand the concept, hence the post today. So, thank you Mr. Designer for helping me think of this post.

What is a loss leader (cost leader)?

Simple - it’s a “front-end” product or service that you give to someone for free or REALLY cheap and typically lose money on. BUT, it’s the “leader” because you have some monetization goal behind it. So, in other words…

“Lure them in with greed then swipe their wallet and run!” I’m obviously just kidding, loss leaders are very kosher marketing if done appropriately and not maliciously.

What are some examples of a loss leader?

1. Rebate Offers - Stores and manufacturers will lose money on one or two products just to get you in the door. They know that you’ll buy other things while there and they may get some loyalty (they’re thinking lifetime value of customer).

2. Free Trials - The company is risking giving you a service for a certain period for free. Why? They are confident they can hook you and start charging you.

3. A Free Web Service - Most “social networks” are loss leaders. They need tons of investment to get started and they don’t make any money for a LONG time. But, they build a database that is worth a lot of money if marketed to.

My Favorite Kind of Loss Leader?

FREE Services - We’re actually working on a service/site right now that has many attractive FREE elements to it. It might be free for the users but has cost us tons to develop and will keep costing us to maintain. BUT, we’re going to use this to build a database of people and obviously soon we’ll start conducting research on them and figuring out what the UPSELL them.

In short, a loss leader can be a great way to generate ultra-targeted leads so long as you can absorb the cost.

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This entry was posted on Wednesday, April 9th, 2008 at 12:22 pm and is filed under Marketing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

3 Responses to “What’s a Loss Leader (or Cost Leader)”

  1. Zach Katkin Says:
    April 9th, 2008 at 3:48 pm

    A dangerous, but exciting game: you don’t even know WHAT or HOW you will upsell.

  2. Mystery CEO Says:
    April 9th, 2008 at 6:02 pm

    Hey Zach,

    Many times I’ve got a VERY good idea why I’m doing it.

    A loss leader is a BAD idea in case you don’t have a plan for it…

    Mystery CEO

  3. Jon Says:
    April 10th, 2008 at 11:02 am

    I think building “free services - loss leaders” have their place in a diversified company, I have created several of them and continue to do so… as long as costs don’t get out of control (ei: build smartly) then they can be a great way to generate revenue for the divisions that WILL monetize the site. Take a look at Sony, they created PS3 which is a LOSS (billions) but they won the format war as a result. If you only have ONE company whose sole focus is to become a loss leader… then you have trouble.

    We live in an incredible time where a company can spread around the world and new streams of revenue are only limited by imagination!

    Jon
    http://woodmarvels.com - Create Unique Memories!

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