Predatory pricing

Predatory pricing is an aggressive pricing strategy where a business sets its prices very low, often below its own costs, to make it hard for competitors to survive. The aim is to take customers away from rivals so their sales and profits fall until they are forced to leave the market.

If it works, the business can eliminate competition and become the main or only seller in its market. It can then raise prices, because customers have fewer alternatives, and recover the money it lost while prices were low. This only works if the business can afford to make losses for as long as it takes, so it usually needs large cash reserves or other products that are still earning profit.

Why it is high risk

Predatory pricing is dangerous because each sale may bring in less money than it costs to provide. A business selling below cost loses money on every unit sold, so the longer a price war lasts, the bigger the losses grow. There is no guarantee that rivals will give up, and a stronger competitor might be able to keep going for longer. Even if competitors leave, the business must eventually raise prices to stop losing money, and customers may then switch to another supplier or stop buying. For these reasons, predatory pricing is not sustainable in the long term.

It is not the same as penetration pricing. Penetration pricing starts low and then rises gradually to build sales, while predatory pricing is deliberately set low to remove competitors.

Worked example: Fernway Soft Play charges £6 per child and it costs £3.50 per child to run a session. When a new play centre opens nearby, Fernway cuts its price to £1 per child. It now loses £2.50 on every child, but it hopes the rival will close. If the rival leaves after four months, Fernway can raise its price to £7. If the rival stays, Fernway keeps making losses and may run out of cash.