The term loss leaderhip defines a pricing strategy, where a product is sold below costs or distributed for free1). The aim of this model is, to lead customers to buy the other products from a company. Thus the product is not priced for the profit but only to attract customers and to stimulate the sales of other goods. It is a common strategy when a company first enters a market or business and wishes to build brand loyalty and other goodwill. By selling the product with a lower price, a competitive advantage results, but this has to be monitored with high precaution, as this strategy might lead to financial problems.
One major target when using the loss leader strategy is to lead customers into the stores2) or to the company, because when they are already inside, they will potentially buy also other items and goods. By that, overall profit is generated. With the loss-leader, the sale of other items is driven to accommodate the loss of the article, which is distributed below costs. Companies need to monitor the sales as quickly as possible in order to not suffer an overall loss. Sometimes, stock-piling might be riskful as this can harness the long term strategy. There are different ways to do a loss-leader strategy:
In terms of software, a loss-leader, often an open source product, is distributed as a market positioner. Value is not generated by the product itself, sometimes donating is available, but is generated by selling additional services or tools to extend the functionality of the free software. Another method is also to have the open-source tool and the commercial tool, which is based on the open source version, to get customers used to the software concept; the commercial tool has much more functionality and the same look-and-feel as the open-source product 4). The free software is used to lead customers to the product range or the company, so that they start to buy the additional items or services provided by the company.
In terms of open soruce software, there are several benefits for companies following this model. Due to the community, the development is speed up and closer to the customers needs, as the programmers probably want to use the tool for themselves. Due to the outsourcing of the programming, the product can be developed cheaper than in a traditional approach. For the business model there are four well known models for generating value of the open source model5)