Posted in Marketing and Strategy Terms, Total Reads: 313
Definition: Cross Subsidization
It is a strategy of setting higher prices for one set of consumers in order to make it possible to sell at lower prices i.e. subsidize to another set of consumers. Thus, it is possible for the company to sustain a low price for one product, by generating enough profits from a certain other set of products. The low prices are usually targeted at attracting customers for a newly launched product.
Cross subsidization can be a useful strategy to launch new products into a very highly competitive market. Offering a good quality product, with appropriate customer service and at a low price point, can lead to rapid increase in sales volume and will help attract consumers spoilt for choice in a certain product category.
However this strategy has its own drawbacks. Although the company may drive up market share for the low priced product, it may rapidly lose market share for the high priced product if the competitors price it competitively (they still remain profitable). Larger volumes of business for the low priced product will drive resources towards it, thus affecting business of the high priced product. This will have a reverse effect on the low priced product – In order to make for the lost business, the company may be forced to increase the price of the lower priced product, thus driving away customers.
Careful planning and monitoring is required to implement cross-subsidization successfully.
For e.g. a company selling men’s garments may sell shirts at lower price, but make up for the lost margins through selling suiting material at premium prices.