Expansionary prices strategy

Expansionary prices strategy
See also
Oligopoly Pricing strategy Resale price maintenance Market expansion Imitator strategy Bargaining power of buyers Trade discount Discount pricing Special offering

This strategy is special form of penetration strategy. It this strategy price are set at a very low level in order to establish a massive market share, sometimes at the expense of other competitors.

The strategy is applied to products with a high price elasticity of demand, so that low prices leads to a substantial increase in sales volume. This strategy is used by many countries to open new markets and expand existing ones. Often companies place cheap and standard products on the market, in order to gain acceptance of customers to their brands. Later, however, they bring more expensive versions and models. Such pricing practices are often closely followed up by the appropriate governmental authorities in order to safeguard against possible use of dumping. In extreme cases, dumping is likely to force the company to go out of business in the countries in which it is applied.

Dumping

Dumping is an extreme case of the expansive pricing strategy. To protect against such extreme pricing practices many countries introduced anti-dumping law.

Applications

The expansive prices strategy was applied effectively by the publishers of magazines and newspapers in the United States. Circulation of many famous magazines and newspapers have been drastically increased by low rates for annual subscriptions. Benefits for publishers was large due to higher fees for advertising. This is related to the amount of circulation. In a similar way book clubs, CD and movie rentals use this strategy to expand their customer base.

Advantages and disadvantages of expansionary prices strategy

Advantages of expansionary pricing strategy include:

• Increased market share: Setting low prices can help a company capture a large market share, especially in new or competitive markets.
• Increased sales volume: Low prices can lead to an increase in sales volume for products with high price elasticity.
• Brand recognition: Companies can use low prices to introduce their brand to new customers and build recognition.
• Higher profits in the long run: Once a company has established a large market share and brand recognition, it can gradually raise prices and increase profits.

Disadvantages of expansionary pricing strategy include:

• Reduced profits in the short term: Setting low prices can lead to reduced profits in the short term as companies may not be able to cover their costs.
• Damage to reputation: Companies may be perceived as offering low-quality products if they are consistently priced lower than competitors.
• Legal and regulatory issues: Setting prices too low may be considered as dumping and can lead to legal and regulatory issues.
• Strong competition: Low prices can attract competitors who may also lower their prices, leading to a price war that can be difficult to win.

References

• Williamson, O. E. (1977). Predatory pricing: A strategic and welfare analysis. The Yale Law Journal, 87(2), 284-340.