How Smart Pricing Strategies Drive Growth

Taking a loss on a product to generate future sales isn’t rocket science. But doing it right can be tricky. In this piece, we’ll look at some real-world loss leader successes and failures, providing insights along the way to help small businesses find the sweet spot that pays off.

What Is a Loss Leader Strategy and Why Do Businesses Use It?

A “loss leader” is a product or service that a business offers at a low price (or even at a loss) to attract customers in the hope of making up the shortfall by selling additional, higher-margin goods or by building long-term loyalty. 

The key is that the loss leader must bring in enough complementary sales or repeat business to justify the strategy. When done right, a loss leader pricing strategy can achieve powerful results such as:

• Increase foot traffic or site visits
• Improve customer acquisition
• Generate goodwill and word of mouth
• Lead to repeat purchases of higher-margin items

But the danger is that the promotion fails to generate incremental revenue — and instead erodes margin, burdens operations, or trains customers to expect lower pricing.

The Red Lobster Case Study: When a Loss Leader Strategy Fails

One of the most talked-about recent examples of a loss leader gone wrong comes from the casual dining chain Red Lobster. In 2023 the chain made its “Ultimate Endless Shrimp” offer — previously a limited-time promotion — into a permanent menu item: for around $20 diners could order shrimp dishes over and over again.

What happened next?

• Customer traffic jumped—one estimate cited a forty-percent lift in visits.
• But the cost of the shrimp, the time diners spent, and the volume eaten overwhelmed the margin cushion. One CFO said the promotion “was one of the key reasons for the losses we generated.”
• The move exacerbated existing structural problems: rising ingredient and labor costs, burdensome real-estate arrangements, under-investment in the brand, shifting customer habits, and ownership-management issues.
• Ultimately the chain announced dozens of store closures and exploratory bankruptcy restructuring.  

In short: the deal drove traffic, but not profitable traffic. As one analyst put it: “If you offer Americans all-they-can-eat, they will eat until you are bankrupt.”  

Successful Loss Leader Examples and How to Use Them Effectively

Contrast the Red Lobster example with companies that use loss-leaders skillfully.

• A grocery retailer might promote a very low price on a staple item (milk, eggs) to bring in customers who then buy higher-margin impulse goods, private-label upgrades, or add-ons.
• A software company might offer a “freemium” tier (loss-leader) to acquire users, then convert a portion to paid plans or upsells.
• A café might offer a discounted pastry with the purchase of coffee during morning hours to build customer habit and frequency.

Effective loss-leaders typically have these traits: their cost is low compared to how valuable customers think they are, they attract more visitors, they prompt extra buying, and they limit risk by being available only for a set time or quantity.

Making Loss Leader Strategies Work for Long-Term Growth

When executed with care, a loss leader strategy can be a powerful growth tool, helping businesses attract new customers, build loyalty, and strengthen brand reputation. But as the Red Lobster case reminds us, they can also backfire if the economics aren’t carefully controlled or if they become the main strategy rather than a lever in a broader plan. 

Before rolling one out, businesses should ask: What is the real cost? What will guests buy as a follow-on? How long will the deal last? How will operations be affected? How does this fit into the overall business strategy?

By carefully weighing the outcomes and keeping an eye on profit margins, businesses can use loss-leaders as a way to reward customers and foster loyalty, instead of ending up with unsustainable promotions and declining profits.