A predatory pricing strategy involves drastically reducing product prices to drive competitors out of the market. This is a risky tactic in which e-commerce businesses slash prices, even shouldering losses as they fail to cover production and shipping costs. The primary objective is to achieve a monopoly or a market with very weak competition, since they will not be able to cope with such significant price reductions, and will lose their sales share. After other brands have been driven out of the market, it will be easier to boost sales and increase profits. Generally, this pricing strategy can only be implemented by large companies with the capacity to handle the initial losses.
What to consider before implementing a predatory pricing strategy
In addition to the ethical debate raised by predatory pricing, you need to consider several aspects that will affect the success of the strategy, if you choose to implement it:
- It will only be worth it for e-commerce businesses if prices are increased again after other brands have been driven out of the market. The original prices will need to be reinstated, to avoid incurring losses. The negative side is that users can notice the manoeuvre and may be upset with the seller. This will damage the brand image.
- In many countries, applying predatory pricing is controlled by competition authorities. In Europe and the United States, for example, this practice is controlled to avoid a market monopoly which affects consumer welfare. The most common sanction is the imposition of fines.
As this tactic is more risky than more conservative pricing strategies, you should carefully analyse your situation and that of your competitors, before launching into it. New businesses and start-ups must know how dominated the market is that they want to start selling in, as they will suffer the most from the impact of predatory pricing.
In-depth knowledge of your competitors’ prices
This competitor analysis should include prices, promotions, and stock of other e-commerce businesses in the sector. It will also be crucial to know the prices they apply over different sales channels, such as B2B portals, marketplaces like Amazon, or price comparison sites such as Google Shopping. You need a global perspective to ensure that once predatory pricing is implemented, your prices will be the lowest in the market by far.
To obtain this wealth of information, you can use a pricing suite. These automated tools analyse competitors’ prices and automatically adjust prices based on the company’s objectives. The most advanced software allows access to unlimited historical data from which it predicts the next market moves, so that you can stay one step ahead of your competitors.
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