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Predatory Pricing—–Will it always work?
Posted by: beier0816 | March 9, 2011 | Leave a Comment
Predatory pricing is considered to be one of the most horrible weapon in pricing strategy. Once a firm uses this pricing strategy, its competitors’ sales are expected to stagnate. Meanwhile, the firm’s own profitability might also suffer if the low price can not even cover the manufacturing cost. Although predatory pricing usually leads to a lose-lose situation, it is always adopted by existing large companies in a certain industry. In their perspective, a temporary loss is worthwhile so long as new entrants are kept out the market.
Which brand of microwave oven do you use? If you ask this question in China, most of people will refer to Galanz. For me, this is the only type of microwave oven in my retrieval set. Galanz is one of the first companies to produce microwave oven in China, and it is notorious for adopting predatory pricing strategy each time a new company is ready to enter the microwave oven market. By doing so, it successfully ruled out almost every single competitors in the industry, and enhanced its leader position.
But years later, Galanz decided to enter the air conditioner market. Although the predatory pricing strategy was powerful when Galanz was the leader in the industry, would it still be powerful when Galanz is the entrant into a new market?
From my observation, the answer is clearly no. Ever since it entered the air conditioner market, Galanz continued to use aggressive predatory pricing. A famous example is ” if you buy an air conditioner for 2680 Yuan, you can get a 2880 yuan watch for free”. Even though this promotion is judged to be legal, it did not work out very well. The main reason is that all existing companies are using consumer-oriented pricing, and focused on quality.
Therefore, my conclusion is simple: you may have an edge by using predatory pricing if you are the leader in this industry. For an entrant, however, using predatory pricing is suicidal!