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Predatory Pricing

 

DisciplinesMarketing > Pricing > Predatory Pricing

Description | Example | Discussion | See also

 

Description

Set your prices so low they capture all of the market. This will drive your competitors away and dissuade others from entering your market.

If you are already a market leader, set prices for your new products lower than those of your existing products. If you are entering a market, undercut the whole market by a sufficient amount to capture a lot of their customer base.

Example

A legal team setting up in a new area offers prices 20% less than the norm for other firms.

A printer manufacturer innovates a new and better machine and prices it 10% less than their machine which is already a market leader.

A startup produces a low-cost product that lets them enter a market at 50% of the lowest competitor. Even though the larger companies fight back, the startup's backers are ready to go the distance to ensure they change the nature of what was a slow, old market.

Discussion

When you are dominant in the marketplace, you will probably have gained the maximum economies of scale. This gives you a margin you can use to undercut competitors and dissuade new entrants. You may also be able to fund predatory pricing from cash cows or other parts of the business.

When you are a market leader, it is easy to sit back on your laurels and price to gain profit from your existing customers. This gives you profit in the short term but it also gives other companies an opening to enter and compete. Predatory pricing may keep out such competitors.

In an existing market, predatory pricing may spark a price war. Be ready to price lower again, even at a loss and for a long period, in order to win this costly competition. Before you even start predatory pricing, look at the history of other competitors for how hard and long they may fight. Then decide if you can afford this battle.

You may win the predatory war, driving out existing competitors, but potential new competitors may notice how this has weakened you and enter the fray just as you think you have won. If you are not ready to continue with a low-cost strategy you could be in for an even longer fight.

Predatory pricing is not good for competition, especially in the longer term, and hence leads to monopolies. This makes it unpopular with governments and regulators who seek to sustain a competitive marketplace, and who may legislate against predatory prices and practices. The result can be expensive anti-trust claims, so you should be careful before deciding to use predatory pricing. Remember also that even if you do not deliberately price in a predatory way, if you have low prices you may be accused of this approach.

See also

Competitive Pricing

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