Posted in Marketing and Strategy Terms, Total Reads: 301
Definition: Predatory Pricing
Pricing forms a very important decision for selling a product as it governs the profitability, the market share, and can act as a deterrent to new entries in the market. Under predatory pricing the product or service is sold at a very low price, in order to drive competition out of the market, or to create barriers to entry for new competitors who wish to enter the market. As the competition and the potential competition isn’t willing and can’t afford and sustain the lower prices without losing money, they go out of operation or choose not to enter the business due to lack of profitable opportunity. It reduces the competition faced by the firm and sometimes creates monopoly by driving all the competitors away.
Predatory pricing generally showcases high level of competition in the market, but sustaining such low prices for sustained period is not possible. Generally companies employ such tactics in order to drive away competition as well as killing competition so that once the competition has been reduced it will be able to price the goods as per will at a rate much higher than the present costs to offshoot the losses and make considerable profits. But there are certain legal frameworks in certain many countries which consider predatory pricing as anti-competitive and render it illegal under competition laws of their land.
One should note a company’s decision to offer very low prices is not necessarily a sign of predatory practices intended to injure competitors. Rather, it might be the beginning of a very competitive market. It is rare for large companies to use low prices to drive competitors out of business with the intent of raising prices later. In order for such a strategy to be successful the company would have to minimize losses considerably over the low-price period
Eg. Initial pricing by Flipkart at a rate cheaper than the cost as well cheaper compared to its competitors Infibeam and Snapdeal were motivated to drive competition out of the online retail market as well as stealing away market share from the brick and mortar stores, but entry of Amazon and increase in backing of snapdeal the online retail remains competitive in order to drive healthy competition by focusing on improving customer experience and convenience and rather reduced focus on pricing