PRICE LEADERSHIP: ADVANTAGES AND DISADVANTAGES
Development of business adjoins with the search for new ideas and possibilities. One of the variants of development for a company is price leadership. What exactly does this term mean, who will benefit, and who will better choose other models of behavior in the market? Let's try to deal with these issues in our article.
Price leadership implies the existence of a market leader. This leader is the dominant company in the industry. What makes it dominant? First of all, it is the ability to successfully set your prices and coordinate them for others. Such a strategy allows to carry out sales more effectively than competitors.
Price leadership is inherent in companies that have homogeneous products. Therefore, customers do not notice differences in characteristics and choose the lowest price. This model is most often observed in a market where competition is less.
For example, a large bicycle manufacturer may set the price at $ 500, and other manufacturers with similar quality will lower the price to remain attractive to buyers. Thus, other manufacturers respond to prices set by the price leader, a large manufacturer.
Price leadership has its advantages and some problems. Next, we will consider them in detail.
Advantages of price leadership
Pricing leadership can be an effective strategy when working with competitors in your industry. The key advantage of price leadership is that the company can set high prices with the support of competitors. This will allow the company to make high profits. If other firms decide to follow suit, price competition in the industry will be suppressed, allowing all participants to generate significant revenue.
The company can reinvest this profit to add more features or improve product quality. This provides an opportunity to increase value for customers in the long run.
If price leaders are able to successfully control and maintain the level of prices for goods or services, it becomes difficult for other competitors to enter the market with the desire to lower prices. The ability to gain customer leadership through a comparable product or service is rare. At low prices, the amount of profit is very low. And for high - the value proposition offered by a new competitor is often too low.
The development of price leadership is able to create a strong system of relationships in one of the industries. Companies can choose creation an enabling environment for the continued growth of all companies, rather than hindering each other.
Disadvantages of price leadership
Price leadership is part of your marketing strategy. Despite the effectiveness of gaining market share, as well as attracting customer attention, it is difficult to successfully develop. The company's management has to work hard to maintain its power over the market.
A price leader cannot force his competitors to follow him. Deciding to raise prices may result in the price leader losing market share as customers may purchase the product at better prices set by other companies. In addition, if the market leader chooses the highest price, and his competitors follow it, it causes dissatisfaction among customers. As a result, businesses may suffer significant losses.
Companies must monitor market trends, and changes in demand when considering reinvestment in their production. This will allow them to continue to receive the income they need. If a company can forecast market changes and its production costs, it can avoid increasing costs before demand falls or another company starts a price war.
Being a price leader is a great prospect, but there can only be one price leader in the industry, so this option is only available to a few companies. Instead, most have to look for a market niche that they can protect through appropriate product differentiation or high-quality service.