Loss Leader

Look at the front page of a supermarket flyer and you can easily find items with prices that seem too good to be true. Pork belly for a few hundred won per 100g, or a tray of eggs for 1,000 won. Items like these sell at around cost or even less, so each sale leaves almost nothing, or even a loss. So why would a store run such big sales and accept the loss?

The secret is in the shoppers' footsteps. The store's real goal isn't to make a profit on that special item. It's to get people through the door in the first place. A shopper who comes in for meat doesn't leave with just meat. Lettuce and ssamjang (a thick dipping paste) to wrap it in, beer, and fruit for dessert all end up in the cart naturally. In the end, the loss on the loss leader is made up by the margins on the other products sold with it.

This strategy doesn't stay in the fresh-food aisle. It's also used very widely in the household appliance and consumer goods markets we use every day. Razors and inkjet printers are the classic examples. The razor handle from a brand like Gillette, or the home printer itself, is sold at a surprisingly low price. That's because the maker gives up almost all profit, or even takes a loss, at the point of selling the machine.

The company's real income comes not from the machine but from repeat purchases of the supplies that follow. Once you buy the machine cheaply and start using it, you often keep buying the matching razor blades or ink cartridges at high prices. Economists even have a separate name for this, the "razor and blades model." By taking a loss at the start to lock in the customer, the company earns back a much bigger profit over the long run through steady sales of supplies.

To be more precise, economics explains this through the principle of "cross-subsidization," where the loss on one product is covered by the profit on another. More recently, digital platform companies that offer a basic service free or at a steep discount to gather users, then make money from paid add-on services, can also be seen as a modern variation of the loss leader strategy.

But the strategy doesn't always go the way the company wants. When smart shoppers, known as cherry pickers, who pick out only the heavily discounted items and buy nothing else, become more common, the store takes a big loss. So sellers limit how many loss leaders each person can buy, and they also design the store layout carefully, for example placing the item at the very back so shoppers have to walk through the whole store.