Loss leader
A product priced at or below cost to bring shoppers in, on the bet that they buy enough other, full-margin items on the same trip to cover the loss. Supermarkets do it with milk, bread or bananas, printer makers with cheap printers and expensive ink. It only works when the leader is something people track the price of and the rest of the basket really follows; otherwise it is just a discount.
Where it's used
Used by retailers, e-shops and razor-and-blade businesses to win store visits or first purchases. Good when the follow-on purchases are predictable and measurable, not hoped for.
How to calculate it
Net effect = Extra margin from other products - Loss on the leader
Worked example
Illustrative numbersA grocery chain sells 1,000 packs of coffee a week at 0.50 below cost. It brings in 400 extra shoppers, who each spend 25 on other products at a 20% margin.
Loss on the leader
1,000 packs × 0.50 loss = 500
Margin from extra baskets
400 shoppers × 25 basket × 20% margin = 2,000
Net effect
2,000 margin - 500 loss = 1,500
What it tells you
The promotion pays only because of the 400 extra shoppers. Count them against a control week, or the loss is all you can be sure of.