When you sell any product or service, you want to strike a careful balance between charging a price that leaves you with a profit and one that encourages customers to buy. Charge too much, and you may price out customers. Charge too little, and you may end up losing money on each sale.
But what happens when you take pricing below the cost of production? This tactic – known as predatory pricing – aims to drive out your competition by forcing them to lower their prices.
The thinking is nefariously simple: reduce your prices enough that they can’t keep up, and you take over the market. But predatory pricing is illegal, as it violates anti-trust laws. If a company is found to have engaged in this practice, it can face hefty fines from regulators.
It’s easy to see why sneaky pricing comes into play in the eCommerce realm. With so many sellers able to enter the market with little overhead, pricing can become a war of attrition.
But customers aren’t the only people who suffer when predatory pricing takes hold. Lower prices for consumers may be appealing in the short term, but long term, they could find themselves with fewer options as companies are driven out of the market by predatory practices.
Let’s take a closer look at the practice of predatory pricing – what it is, how it impacts everyone involved in business, and what you should be doing to make sure you avoid engaging in this practice.
Definition: Predatory Pricing?
A predatory pricing definition could be summed up as a practice of setting prices at levels that are deemed to be below cost in order to drive out competition. Rather than allow natural market forces to determine who will win and lose, companies engaging in predatory pricing try to manipulate the market so that they can gain a competitive advantage.
Predatory pricing is typically used as a tactic to gain control of a sector or industry by forcing competitors out of business. There are two primary strategies used: price skimming and price dumping.
Price Skimming
Are you trying to gain control of a high-end market? Price skimming involves setting a high price for a product in order to maximise profits and discourage competition. This pricing strategy allows the company to capture more of the profits while still controlling demand. The downside of this approach is that it can limit potential customers if the prices are too high.
For example, if you sell a set of popular headphones, you could initially set the price at a high rate and use marketing tactics to encourage people to buy them. Once you realize that other companies are beginning to offer headphones of similar quality, you can reduce the price of your headset and remain competitive.
Price Dumping
On the other hand, price dumping involves setting prices at a low level. This strategy is used to gain market share quickly and make it difficult for competitors to enter. The goal is to generate revenue through volume sales instead of higher prices.
For example, if you run a t-shirt company, you could set the price of your t-shirts to an extremely low rate when compared with similar sellers in your market. This would make your product more affordable and attractive to customers - because who doesn’t love a bargain? The downside is that it could reduce your profit margin, especially if other companies also respond to your pricing strategy by reducing their prices.
Is Predator Pricing Illegal in the UK?
For UK businesses, it’s important to note that predatory pricing is illegal and could result in hefty fines or other penalties. The Competition and Markets Authority (CMA) has strict regulations when it comes to pricing strategies and has the power to investigate businesses suspected of engaging in anti-competitive behaviour.
Beyond the UK, the EU has a competition law that limits predatory pricing practices. In the US, certain states have laws regarding predatory pricing, but enforcement is limited.
For eCommerce sellers, this creates a unique challenge. While it’s important to watch competitors' prices and adjust your own accordingly, you must also be careful not to engage in predatory pricing, which could result in legal action.
Am I Engaging in Predatory Pricing?
You may be worried that your pricing strategies have crossed the line into predatory pricing. Here are a few warning signs that may indicate you’re engaging in predatory practices:
- You’re pricing products well below actual costs.
Sure, finding a competitive pricing strategy is key, but if you find yourself selling products at prices that are well below your actual costs, you may be in the realm of predatory pricing. - You’re regularly monitoring competitor prices and quickly matching or beating them.
Keeping an eye on competitors can be helpful for finding good deals or interesting products—but if you’re constantly dropping your own prices to match or beat your competitors, you may be engaging in predatory practices. - You’re pricing products to drive away competition.
If you’re intentionally setting prices to drive away your competition, then you’re most likely crossing a line into predatory pricing territory. - You intend to raise prices once your competitors have been forced out of the market.
These efforts particularly concerning from a competition law perspective, as they seek to completely eliminate any rival sellers and take control of the entire market. - You’re engaging in predatory pricing by creating unique partnerships or alliances.
If you build business relationships with suppliers or distributors that are exclusive to your company and inhibit competitors from accessing the same resources, then you may be engaging in predatory pricing.
Is Dynamic Pricing Predatory?
Dynamic pricing is a key pricing strategy that allows businesses to adjust their prices in response to market conditions. It can be beneficial for both buyers and sellers and help create a more competitive environment.
However, dynamic pricing can also be used in an anti-competitive way if it is abused or misused. For example, if you use dynamic pricing to target a specific competitor and undercut their prices, your actions could constitute predatory pricing. This type of competitive behaviour is illegal and can lead to antitrust lawsuits from both the government and other businesses.
Ultimately, if your dynamic pricing strategies price out some customers completely, it could be seen as a form of price gouging - so make sure to use dynamic pricing responsibly and with caution.
Tips to Price Properly
To make sure your pricing strategies are fair and competitive, you should always be aware of the legal implications. This includes being mindful of any applicable antitrust laws and keeping up with changes in the consumer market and customer sentiment. For eCommerce, knowing geographical pricing regulations and understanding the competitive landscape is critical.
Take advantage of pricing tools that keep your prices competitive and compliant with the law, so you can focus on driving sales without any legal headaches.
One of the best ways to price your services and products effectively is with tools that allow you to track pricing in real-time. BlackCurve - a leading eCommerce pricing tool - uses AI and data science to look at competitors’ prices and suggest competitive pricing strategies. This allows you to set realistic prices that comply with the law, all while maximising returns.
With the right tools and strategies, you can set effective and competitive prices that keep customers returning for more. With BlackCurve, you can take control of your pricing decisions and maximise returns. Try it now to get started!