Loss leader

Sell the starter product at a loss to attract repeat purchases

Hypothetical: a widget maker sells its entry-level model at a loss, hoping customers later buy higher-margin replacement parts. Those follow-on purchases and an overall profit are not guaranteed.

Test the follow-on purchases

The calculation has to follow the customers brought in by the offer. The FTC’s economic research on loss leaders models low-markup products as a way to compete for customers who make profitable additional purchases.

Whether that happens in a particular business needs evidence.

Hypothetical: 100 customers each buy one starter product for $30. Its variable cost is $35, so those sales lose $500 in total before fixed costs.

Each refill sells for $10 and has a $4 variable cost, contributing $6. Assume no other variable costs or returns.

Those customers must buy 84 refills to cover the $500 starter-product loss: 84 × $6 = $504. If they buy only 40, the refills contribute $240 and the combined sales still lose $260 before fixed costs, financing costs and tax.

The test uses observed repeat purchases, not an assumed lifetime of refills.

Loss leaders and other discounts

A temporary discount can still leave a positive margin on the discounted product. A loss-leader strategy depends on what customers buy in addition.

A below-cost sale alone also does not establish unlawful predatory pricing; the FTC’s US guidance considers harm to competition and the ability to recover losses through later higher prices.