Preventive pricing strategy

Preventive pricing strategy is a pricing strategy that is used to prevent competitors from entering a market or to discourage existing competitors from expanding their market share. This strategy involves setting prices that are high enough to make it difficult or unprofitable for competitors to enter or expand in the market. The goal is to maintain or increase market share by making it difficult for competitors to compete on price.

There are several ways that companies can use preventive pricing strategy, including:

• Price skimming: Setting prices initially high and gradually reducing them over time. This can discourage new competitors from entering the market because they will not be able to match the high prices initially charged.
• Price leadership: Setting prices high in order to establish a market leader position and to discourage new competitors from entering the market.
• Price bundling: Offering a package of products or services at a discounted price in order to discourage competitors from entering the market or to discourage existing competitors from expanding their market share.
• Price discrimination: Charging different prices to different groups of customers in order to discourage competitors from entering the market or to discourage existing competitors from expanding their market share.
• Capacity withholding: Deliberately reducing the production capacity in order to limit the supply of goods and services, which can help to increase prices and discourage competitors from entering the market.

Preventive pricing strategy can be an effective way for companies to maintain or increase market share, but it can also be risky. It can lead to customer dissatisfaction and to decreased sales if the prices are set too high, or if customers can find better deals with competitors. Moreover, if competitors find ways to produce goods or services at a lower cost, they can still enter the market, even with higher prices.

Application

This strategy is particularly well adapted to the situation in which the company has patents that protect the product or has an advantage over other companies resulting from the diversity of products, and when entry is relatively easy.

Delaying the market entry of competitors gives companies a chance to increase its market share and reduce unit costs through economies of scale or experience, as well as allow to gain the recognition as the pioneering brand on the market.

Effects of application

One example can be RCA Corporation which used this strategy with the launch of color TV. Low price had to provide them time needed for improving manufacturing technology of color cathode-ray tubes before the advent of large-scale competitors, cost reduction and gaining a strong position on the market of color TVs.

Examples of Preventive pricing strategy

• One example of a preventive pricing strategy is pricing products at a level that is higher than the cost of production. This strategy makes it difficult for competitors to enter the market because they would have to charge higher prices in order to make a profit. Companies that use this strategy often have a competitive advantage in terms of quality or brand recognition, and they can use their higher prices to discourage competitors from competing on price.
• Another example is setting prices that are higher than what the customer is willing to pay. This makes it difficult for competitors to enter the market because they would have to charge lower prices in order to attract customers. Companies that use this strategy can maintain their market share by charging higher prices than their competitors.
• A third example of preventive pricing strategy is offering discounts to loyal customers. This strategy makes it difficult for competitors to gain market share because loyal customers may be reluctant to switch to another company, even if it offers lower prices. Companies that use this strategy can maintain their market share by offering discounts to loyal customers.

Advantages of Preventive pricing strategy

Preventive pricing strategy is a pricing strategy that is used to prevent competitors from entering a market or to discourage existing competitors from expanding their market share. The advantages of this pricing strategy include:

• Preventing new market entrants: By setting prices high enough, the strategy can discourage new competitors from entering the market. This can help to maintain a company’s market share and protect it from potential competition.
• Discouraging existing competitors: High prices can also make it difficult for existing competitors to expand their market share. This can help a company to maintain its position in a market and prevent competitors from taking away customers.
• Taking advantage of economies of scale: The cost of production can decrease as the scale of production increases. Using preventive pricing can help a company to take advantage of these economies of scale and realize cost savings.
• Enhancing reputation: By setting prices that are competitive, but still high enough to deter competition, a company can establish a reputation for being competitive. This can help to attract more customers and increase market share.

Limitations of Preventive pricing strategy

The preventive pricing strategy has several limitations, including:

• It is difficult to accurately calculate the price that will be effective in preventing competitors from entering the market. If the price is set too high, it could lead to a loss in sales, whereas if it is set too low, it could fail to prevent competitors from entering the market.
• It can lead to price wars with competitors, which can be costly and damaging to both parties.
• It does not guarantee long-term success, as competitors may find alternate ways of entering the market.
• It can be difficult to maintain high prices over the long term, as customers may start to expect discounted prices.
• It can lead to higher prices for customers, which could lead to a decrease in demand and overall sales.

Other approaches related to Preventive pricing strategy

The other approaches related to Preventive Pricing Strategy are:

• Penetrative Pricing: This approach is used to discourage competitors from entering the market by setting a low price for a product. The goal is to make it difficult for competitors to generate profits from the sale of their products.
• Skim Pricing: This approach involves setting high prices for a product in order to "skim" the maximum amount of profits from customers. The goal is to discourage competition by making it more expensive for competitors to enter the market.
• Price Discrimination: This approach involves setting different prices for different customers in order to discourage competitors from entering the market. The goal is to increase profits by charging different prices to different customers based on their ability to pay.

In summary, Preventive Pricing Strategy involves setting prices in such a way as to make it difficult or unprofitable for competitors to enter or expand in the market in order to maintain or increase market share. Other approaches related to this strategy are penetrative pricing, skim pricing, and price discrimination.

Preventive pricing strategy — recommended articles

Price strategy to eliminate competitors — Competitive Pricing — Skimming pricing strategy — Imitator strategy — Pricing strategy — Clientele effect — Penetration strategy — Product line pricing — Trade discount

References

• Jobber, D., & Shipley, D. (2012). Marketing-orientated pricing: Understanding and applying factors that discriminate between successful high and low price strategies. European Journal of Marketing, 46(11/12), 1647-1670.