Preventive pricing strategy
| Preventive pricing strategy |
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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.
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.
