In a strategy using leader pricing, a retailer will price certain merchandise at very low prices. The leader price might even be just slight above or at cost, which means that the margins on the particular item will be low or even zero. The strategy behind leader pricing is to entice consumers into the store. The retailer hopes that once people are in the store, there will be many other items that are at full price and that attract their attention. If consumers buy other merchandise that carry higher margins, it will offset the reduced margin on the items being priced at leader pricing.
Leader pricing is different from bait pricing. While both offer merchandise at significantly reduced prices, with leader pricing, the retailer is willing to sell the merchandise at the advertised price because it forms a part of the overall product mix and the strategy is to use the loss leader item to sell more high-merchandise units. Bait pricing is similar in that the retailer offers certain items at extremely low prices, often at cost or slightly above, just like with leader pricing. However, the primary difference is that with bait pricing, the retailer hopes to convince the customer to purchase a similar item at a higher price.
An example of bait pricing would be that the retailer offers generic widgets at the very attractive price of $1 per widget. However, when the customer tries to purchase the $1 widgets, there are none left or the salesperson aggressively tries to convince the purchaser to buy a branded widget at $3 instead of the generic one. This is often referred to as bait-and-switch tactics.
Because the marketing plan with leader pricing is aimed at getting more foot traffic into the store, the retailer often includes a few loss leader items in the overall marketing mix. This makes sense because the retailers understands that the loss leader item will generate little to no margin but expects the other merchandise—often marketed as aggressively as the loss leader item—to offset the pressure on consolidated margins.