Price strategy to eliminate competitors
This strategy involves the fixing of prices at a low level to destroy the competition. Prices are usually below the level of the costs of production.
Objectives
The intent of this pricing policy is harming the competition even when it brings the financial loss to the company. Only after the elimination of competition, prices can be raised to a level ensuring the profit.
One of the American oil companies eliminated competitors by reducing on local markets prices to half of the cost. After that competitors were bought by the company at nominal price. The company then fought back from losses on the market without competition, setting prices higher than normal and become a monopolist in the market.
Such pricing practices are also called "plundering pricing". To be able to use such pricing, the company must dominate the industry and have a strong financial position. It involves big risks for the financial situation.
In the 19th century, price plundering was widely used in many industries for example. oil, tobacco, sugar. However, they met with large resistance, because they were treated as a form of illegal discrimination, weakening competition and favouring the formation of a monopoly.
Currently, the company apply a mild form of price plundering, selective price reductions to certain ranges within the product line. For example, a company producing cameras can set unprofitable prices on cheaper models to boost sales of the entire product portfolio. Such companies are coming out with the assumption that losses arising as a result of the sale at a reduced price will be offset by sales of more expensive products.
See also:
Examples of Price strategy to eliminate competitors
- Price Skimming: Price skimming is a pricing strategy where a company sets a higher initial price for a product or service and then gradually reduces it to attract more price-sensitive customers over time. This strategy is usually used to recoup the costs of development and production quickly, while also creating an impression of exclusivity and value.
- Price Discrimination: Price discrimination is a pricing strategy where a company charges different prices to different groups of consumers for the same product or service. This strategy is used to maximize revenue by charging different prices to consumers with different levels of willingness to pay.
- Price Bundling: Price bundling is a pricing strategy where a company offers multiple products or services at a single, discounted rate. This strategy is used to increase sales by encouraging customers to purchase multiple items in one discounted package.
- Loss Leader Pricing: Loss leader pricing is a pricing strategy where a company offers a product or service at a loss in order to attract customers and increase sales of other items. This strategy is used to attract customers who may be willing to purchase more expensive items in the future.
- Predatory Pricing: Predatory pricing is a pricing strategy where a company sets prices below the cost of production in order to drive competitors out of the market. This strategy is used to gain market share and eliminate competition.
Advantages of Price strategy to eliminate competitors
This pricing strategy can be beneficial for businesses as it can help to eliminate competitors from the market. The advantages of this pricing strategy include:
- Lowering the cost for consumers: By setting prices at a low level, businesses can provide their customers with more affordable goods and services. This can help businesses to gain a larger market share and increase their customer base.
- Attracting more customers: By offering low prices, businesses can attract more customers and retain existing customers. This can help businesses to improve their profitability, as more customers are likely to purchase their products or services.
- Increasing market share: By eliminating competitors, businesses can gain a larger market share. This can help businesses to have more control over the market and increase their profits.
- Creating a barrier to entry: By setting low prices, businesses can make it difficult for new competitors to enter the market. This can ensure that businesses maintain their dominance in the market and remain profitable.
Limitations of Price strategy to eliminate competitors
Price strategy to eliminate competitors can be effective in certain competitive situations, however, there are several limitations to be aware of. These include:
- The cost of production must be taken into account when setting prices. Even if a business heavily discounts its products, if the cost of production is higher than the sale price, the business will still be making a loss.
- By setting prices too low and squeezing out competitors, a business may be in breech of antitrust laws.
- If a business sets prices too low, it may attract attention from competitors and lead to retaliatory actions, such as price wars.
- Depending on the market, businesses may find it difficult to raise prices after a period of aggressive discounting, as customers may have become accustomed to lower prices.
- Low prices may mean lower profits, which in turn could affect the business’s ability to reinvest in growth and new products.
One approach to eliminate the competition is to use a price strategy. There are several other approaches that can be used to achieve the same goal, including:
- Bundling products: This involves offering a combination of related products at a discounted price, making it difficult for competitors to match the same offer.
- Product differentiation: Companies can differentiate their products by adding unique features, making them more attractive than the competitors’ offerings.
- Introducing new products: Companies can introduce new products to the market to outpace their competitors.
- Creating a loyalty program: Companies can create a loyalty program to reward their customers for their purchases, thus encouraging them to remain loyal to the company.
In summary, price strategy is only one of the ways to eliminate competitors. Other approaches that can be used to achieve the same goal include bundling products, product differentiation, introducing new products and creating a loyalty program.
| Price strategy to eliminate competitors — recommended articles |
| Preventive pricing strategy — Trade discount — Skimming pricing strategy — Customary pricing — Pricing strategy — Fair competition — Captive pricing — Expansionary prices strategy — Discriminatory pricing |
References
- Hamilton, R., & Chernev, A. (2013). Low prices are just the beginning: Price image in retail management. Journal of Marketing, 77(6), 1-20.
