While it may seem counter-intuitive, it is entirely possible for a firm to be successful while it remains unprofitable. This phenomenon has been observed in businesses ranging from startups to multinational corporations, though often for different reasons and with different strategies in mind.
Price wars are known to happen in highly competitive industries. This occurs when two or more companies are competing for market share by having a race to the bottom in terms of their products' prices. This strategy is more common in sectors where customers are highly price sensitive. When these warring businesses price their goods at a level that is below the cost of producing the product, they become unprofitable. However, this isn't a bad strategy in the short run. Larger companies will often use this strategy to drive their competition out of business or force them to change markets. It is important to abide by laws in the markets you do business and understand to what extent such practices are considered to be "predatory" or illegal.
Since multinational corporations have more cash on their balance sheets, they can afford to allow one product to become unprofitable while maintaining a successful portfolio through a suite of other profitable products. Smaller companies on the other hand typically cannot hold out as long as large companies and need to compete on more than price alone in order to survive.
A second example of this phenomenon has to do with unproven or knowledge based organizations that haven't yet shipped products or published relevant research. These firms are incurring costs for salaries, research and development, equipment or whatever the case may be and have yet to acquire revenue through sales. The success for many of these organizations comes from other future activities such as technological advancements or breakthroughs in research. Success in these other domains may even act as a catalyst for future financial success when a tangible product is ready to be released. This type of firm is typically associated with a research organization, think tank, university or even a division within a larger company.
Newer companies, and startups in particular, will often sell their product at a loss or even offer it for free in order to generate a customer base. This strategy involves waiting until a critical mass of customers is obtained before raising prices and realizing large profits. Developing a critical mass of customers first is important to ensure that the product has been accepted by the general masses as a highly desired product, or even a necessity. Many business analysts believed this was Amazon's strategy regarding the Kindle e-reader. Since e-readers needed to garner public acceptance before they became mainstream, it is rumoured that the Kindle was initially being sold below its production cost.
One variation on the theme of being both successful and not profitable involves offering a product at a loss in order to sell a complementary product with high profit margins. The classic example of this is printers which are often priced at a discount in order to attract customers. In order to use the product, customers must also purchase high profit margin ink cartridges at a high price on a regular basis.
Another opportunity for applying this strategy is in garnering initial trials. When price-sensitive customers are drawn to a great savings for a product, they may discover the product for the first time and realize how much they like it. New customers may develop a slight affinity or loyalty to the brand and not be so affected when prices go up. This increases the market share and long term profitability of the company though may be a reason for short term unprofitability.
As the evidence shows, there are a variety of strategies that businesses use to manipulate the marketplace in order to obtain eventual profits. The only commonality between these strategies is that no business decides to sell a single product at a loss indefinitely if it is the only product they intend to sell.
Image Source: https://www.flickr.com/photos/dierken/948171048/