Definition of a loss leader: Goods or service advertised and sold at or below cost price. Its purpose is to bring in (lead) customers into the store on the assumption that, once inside the store, the customers will be stimulated to buy full priced items as well.
If you have inventory that isn't moving or if you are overstocked on a particular item, making it a loss leader may move it. By cutting the price of this item, you'll reduce inventory and stimulate traffic.
If you would like to be known for having low prices then the loss leader pricing strategy may help associate your business with that belief. Keep in mind that customers want good quality merchandise for less money and not junk.
With loss leaders, you will want to try to stay within your niche. For example, if you sell auto components and find a deal on oven mitts, you'll want to think about bypassing this deal because it is more than likely your niche customer is not interested in oven mitts. However, your customer may be more interested in car air fresheners.
Some larger sellers have the opportunity to buy closeouts from vendors and acquire excellent deals at wholesale costs, therefore are able to offer incredible deals without losing money.
If you aren’t ready to make a large purchase, don’t despair. There are plenty of deals to be had around town. Give your local Big Lots, Walgreens, Family Dollar, or Walmart stores a try. Search for clearance items that will coincide with your niche. And make certain to check after holidays for special markdowns.
Using loss leaders as a marketing tool can help gain new customers and increase return visits. Folks like a bargain and will likely come back to shop in your store.