Setting the right price for your products or services is a delicate balancing act. You need to attract customers while ensuring profitability. Price too high, and you risk losing sales. Price too low, and you might hurt your margins. But what happens when prices drop below the cost of production?
This tactic, known as predatory pricing, is used to drive competitors out of the market. The strategy is deceptively simple: lower prices so aggressively that rivals cannot compete, forcing them to exit the market. Once competition is eliminated, the predator can dominate and raise prices unchecked.
While this may sound like a ruthless business move, predatory pricing is illegal in many countries, including the UK, as it violates competition laws. Let’s delve deeper into predatory pricing examples, how it affects the market, and the steps you can take to avoid falling into this unethical trap.
What is predatory pricing?
Predatory pricing occurs when a business sets its prices so low that it cannot cover production costs, with the goal of eliminating competition. This practice manipulates market forces to gain an unfair advantage rather than letting natural competition decide winners and losers.
Companies typically employ two main strategies in predatory pricing: price skimming and price dumping.
Price skimming
Price skimming is more common in premium markets. A business initially sets high prices to capture early adopters and maximize profits. Over time, as competition emerges, prices are lowered to maintain market share and stifle competitors.
For example, imagine launching a high-end smartwatch. Initially, you might set the price significantly higher to target tech enthusiasts. Once competitors release similar products, you drop the price to make it harder for new entrants to compete.
Price dumping
Price dumping involves setting extremely low prices to gain market share rapidly. This tactic sacrifices margins in the short term to undercut competitors. The idea is to attract price-sensitive customers and make it difficult for rivals to stay afloat.
For instance, a t-shirt retailer might sell shirts at an unsustainably low price compared to competitors. While this draws in bargain-hunting shoppers, it squeezes competitors’ profits, potentially driving them out of business.
Predatory pricing and the law
Predatory pricing is illegal in the United States as a result of several rulings by the US Supreme Court, and enforcement is overseen by the Federal Trade Commission (FTC). Engaging in this practice can result in substantial fines or legal penalties. Similarly, the European Union enforces strict competition laws to deter predatory pricing.
For ecommerce sellers, navigating pricing strategies is particularly challenging. While monitoring competitor prices and adjusting your own is necessary, setting prices too low with the intent to drive out rivals can lead to legal repercussions.
Recognizing predatory pricing practices
If you’re concerned that your pricing strategies may veer into predatory territory, here are key warning signs to watch for:
- Selling below production cost: Continuously pricing products at a loss could signal predatory intent.
- Constantly undercutting competitors: Aggressively lowering your prices to match or beat competitors every time they adjust theirs.
- Intent to dominate the market: If your pricing strategy aims to eliminate competitors entirely, it may cross the line into illegality.
- Exclusive partnerships: Building supplier relationships that limit competitors’ access to essential resources can also be considered predatory.
- Raising prices after competitors exit: Intentionally setting low prices with plans to increase them once rivals are out of the picture is a classic predatory move.
Predatory pricing vs. dynamic pricing
Dynamic pricing — adjusting prices in response to market conditions — is a legitimate and widely used strategy. However, dynamic pricing can slip into predatory territory if used to systematically target and undercut specific competitors. For example, if dynamic pricing consistently results in below-cost pricing to force competitors out, it could raise legal concerns.
The key is to use dynamic pricing responsibly. Platforms like Intelis can help you implement dynamic pricing strategies that maximize profitability without violating competition laws.
The ripple effects of predatory pricing
Predatory pricing doesn’t just harm competitors — it can have far-reaching consequences for the entire market and consumer base.
- Reduced competition: Consumers face limited choices with fewer players in the market.
- Monopolistic practices: Once a predator dominates the market, they can raise prices unchecked, often leading to higher costs for consumers in the long term.
- Market instability: Frequent price wars can disrupt supply chains and erode trust between businesses and consumers.
How to avoid predatory pricing
To ensure your pricing strategies remain ethical and competitive, follow these best practices:
- Monitor costs: Always set prices that cover production costs and leave room for a sustainable margin.
- Use pricing tools responsibly: Leverage pricing monitoring tools to track competitors and set prices strategically, not destructively.
- Comply with regulations: Stay informed about competition laws in your region and ensure your pricing aligns with legal guidelines.
- Focus on value: Compete on the unique value of your products rather than solely on price. Emphasize quality, service, or innovation to differentiate your offerings.
- Avoid targeting specific competitors: While it’s essential to monitor competitor pricing, avoid pricing decisions that are aimed explicitly at driving rivals out of the market.
Leveraging ethical pricing for success
While predatory pricing may seem like a shortcut to dominance, it comes with significant risks and long-term consequences. Instead, focus on ethical pricing strategies that prioritize sustainability and customer value.
Intelis AI’s pricing tools enable ecommerce businesses to implement smart, compliant pricing strategies. You can stay competitive without crossing ethical or legal boundaries by analyzing competitor pricing in real-time.
Take control of your pricing decisions with confidence.
