The online market is booming with companies every second. New startups and online retail stores are emerging at a breakneck speed and matching with the consumer demands can be a really daunting task. Although, there are different types of pricing strategies that are being used by businesses for being competitive and survive in the market. The right pricing strategy offers a competitive advantage as well as contributes to sales and revenue growth. Today, we will have a detailed look at the concept of price leadership and how it can benefit your business.
What is Price Leadership?
Price leadership refers to a practice where a leading company in the industry is able to exert influence for effectively determining the price of goods and services in the market. This type of organization is also known as a price leader in the market. The practice is quite prevalent in industries with oligopolistic market conditions.
According to definition the type of market where a firm can set the prices for the industry as a whole and other small firms have to follow the price level is known as price leadership. It occurs when a firm enjoys the most market share owing to the unique knowledge of market forces.
Now, that we know the price leadership definition and meaning, it is time to look at some examples.
Price Leadership Example
One of the top examples of an oligopolistic market is the airline industry with fewer players in the industry. This influence by the price leader often leaves the competitors with no option but to follow the leader and match the price if they wish to hold on to their market share.
In the airline sector, the dominant company practices price leadership by setting the prices and other airline companies are compelled to simply adjust the prices for sustaining the competition. In many cases, it is not possible and hence the company gets to enjoy its price leadership and influence in the market. Generally, price leadership is applied as a strategy in large corporations.
Price Leadership Strategy
As mentioned above, the price leadership strategy works by setting a specific price for the product price which other firms in the industry follow. This type of strategy can only work in an oligopolistic market where there are only a few players in the market.
The strategy can prove to be beneficial for businesses. If the firms in a specific market follow the price leader by setting higher prices, all the manufacturers in the market can earn a profit, considering the demand remains constant.
How Price Leadership Works
There are specific economic conditions in the industry which lead to the emergence of price leaders in a market. These conditions are as follows:
- The number of companies in the industry is limited.
- Entry to the industry is restricted.
- Demand is inelastic/ less elastic.
- Products are homogenous.
- Companies have the same long-run average total cost.
Price leadership is often practiced in a sector where the products or services offer little differentiation when compared from one producer to another. Price leadership also emerges when the demand for a particular product is high. It leads to consumers moving away from a competing product. Thus, the price of a product witnessing higher demand from the consumers becomes the market leader.
Type of Price Leadership
There are three main types of price leadership which are as follows:
Barometric price leadership happens when a specific organization is an expert at identifying the shifts in market forces like changes in the cost of production. This enables the company to respond to market forces in an efficient manner. A company with a lesser market share can also act as a barometric price leader if they are good producers and their company is keeping pace with the latest trends in the market.
In such cases, other companies will follow suit believing that the price leader is aware of something which they haven’t realized yet. The barometric leader has only little power to impose the force on other companies in the industry and hence their leadership is short-lived in most cases.
Collusive price leadership emerges in markets with oligopolistic market conditions. Price leadership occurs because of implicit or explicit agreement within a few dominant companies to keep the prices in alignment. It is not a hidden fact that smaller companies in the market are forced to follow the price change initiated by the dominant companies. It is quite prevalent in the industries where cost of entry is high and the cost of production is known.
The implicit or explicit agreement within the firms might be the illegal if they plan to defraud the customers. There is a thin line of difference between price leadership and illegal practice of collusion. The price leadership practice is considered collusive and illegal when the changes in the price of products are not related to the changes in the operating cost.
The dominant price leadership refers to one company controlling the majority of the market share in any industry. Within the industry, there are smaller firms as well offering similar products/ services as the leading firm. But they have no influence over the prices.
The dominant price leadership model is also referred to as a partial monopoly. In this type of model, the price leader engages in predatory pricing. It means lowering the prices to a level where smaller companies find it impossible to compete and stay n the business. In most countries, business that follows predatory pricing aimed at impacting smaller companies is considered illegal.
Advantages of Price Leadership
Price leadership also has the potential to reduce instances of price wars. If a market has companies of similar size, the absence of a price leader can lead to the elimination of price war as each company tries to boost its market share.
It can also lead to improvement in the quality of products due to increased profits. Increase in profit means more budget for investment in research and development. It positively impacts the ability to develop new products for delivering value to the buyers.
Price leadership can also lead to interdependence instead of rivalry if the firms choose a parallel pricing structure. It creates a positive environment for growth.
1. Unbeatable Competitive Edge
WebDataGuru can help with its price intelligence tool that enables ecommerce companies an unrivaled advantage in the market. Let us elaborate. By offering prices that are consistently lower than the competitors, businesses can capture the attention and loyalty of price-conscious shoppers. Ultimately, this competitive edge helps in carving a distinctive space in the ecommerce landscape, setting the stage for long-term success.
2. Long Lasting Customer Loyalty
Now, online shopping ensures that customers are always bombarded with millions of brands on a daily basis. So, it does become a challenge to stand out from this crowd. It becomes significantly important to garner loyalty in the minds of the customers. And that’s where price leadership can help. When shoppers recognize an ecommerce company as a provider of unbeatable value, they return for repeat purchases and also refer to their contact sphere. This loyalty solidifies the customer-business relationship, driving positive word-of-mouth referrals and sustainable growth. This is very vital for surviving and thriving in today’s competitive landscape.
3. Boost The Market Share with Strategic Influence
The online market is filled with many companies. And everybody is getting cutthroat. Now, for big giants like Amazon, eBay and Walmart, it is easier to pump a lot of resources. Which is not the case for other SMEs. So, by leveraging economies of scale, optimizing costs, and forging strategic partnerships, ecommerce companies and any size for that matter, can mitigate the impact of lower prices. The resulting customer influx and repeat business contribute to overall revenue growth and sustainable profitability.
Unlock Business Possibilities with Price Leadership
Price leadership is a game-changing strategy that can revolutionize your ecommerce business. Don’t miss out on the opportunity to attract a larger customer base, drive profitability, and establish a strong market presence. Embrace the power of price leadership and take your eCommerce business to new heights of success. Together, let’s redefine your business’s future with the power of price leadership.
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