Why Sell It Below Cost? To Get You Through the Door

The tactic rests on the observation that people do not buy a single item and go, so a price low enough to bring somebody into a shop pays for itself through the rest of what they put in the basket, through the visits they make afterwards, and through the impression that the shop is generally cheap. The item chosen is usually one whose price people actually remember and compare, since the tactic only works if customers can recognise a bargain, and it is usually something bought frequently. Everything else can then be priced normally, because most customers do not know what most things should cost.

The items used share recognisable characteristics:

• •Staples bought regularly, so the price is familiar
• •Milk, bread, eggs and bananas in a supermarket
• •Seasonal items around a holiday, sold at or below cost
• •Games consoles, sold cheaply to sell games afterwards
• •Printers, sold cheaply because the ink is where the margin is
• •The item is placed at the back, so customers pass everything else

The tactic fails in identifiable ways and each has a name in the trade. Cherry picking is customers buying only the discounted item and nothing else, which some shoppers do systematically by visiting several shops for their offers, and it turns the whole exercise into a straight loss. Stockpiling is customers buying a year's supply at the promotional price, which brings forward sales that would have happened anyway at full price. Reference price damage is customers concluding that the normal price is unjustified, which makes them unwilling to pay it later. And a competitor matching the price immediately removes the advantage while leaving both shops worse off.

A related tactic is frequently confused with this one and works quite differently. Selling an item at a low margin rather than at a loss, purely to attract attention, is ordinary promotion and carries none of the same risks or legal exposure. Selling a device cheaply to create a captive market for consumables is a different model again, since the loss is recovered from the same customer over time rather than from the rest of a basket, and it depends on preventing competitors supplying the consumable, which is why printer cartridges carry chips and why the legality of blocking third-party refills has been litigated repeatedly in several countries.

Selling below cost is restricted or prohibited in a number of countries, on the argument that a large retailer can sustain losses long enough to drive out smaller competitors and then raise prices once they are gone. France, Germany, Ireland and several American states restrict it in various ways, and some laws target specific goods, with minimum pricing on alcohol being a public health version of the same mechanism. Enforcement is difficult, since establishing what an item actually cost a retailer is genuinely complicated once volume discounts, supplier payments and shared overheads are counted. Economists disagree about whether the predatory harm is common enough to justify the restriction.

Pricing a familiar item below cost works because people arrive to buy it and leave with a basket priced normally, which is why the items chosen are staples whose price customers actually remember and why they sit at the back of the shop. Customers who buy only the offer, or who stockpile it, defeat the exercise. Several countries restrict selling below cost on the argument that it drives out smaller competitors.