One of the main goals of any business is to make money. But how do you go about this objective when you are operating in a competitive marketplace?
Well, one of the ways that some businesses boost their bottom line is by intentionally losing money first. These companies price lower than their competitors for as long as necessary until most of them go out of business.
Then they increase their price and enjoy market domination. This is called predatory pricing.
The use of predatory pricing is actually illegal. But businesses still apply this pricing method because it’s not policed as closely as price collusion for example. Some use partial predatory pricing, also called ‘loss leading’ instead. This is when a company makes a loss to attract new customers and then increase price.
Uber, the taxi company, is a perfect example. When it starts operation in a new city, it uses predatory pricing. It floods the city with cheap taxi rides and deliberately makes a loss. But once some of its competitors go bust and it starts gaining some market share, it increases prices.
Predatory pricing on Amazon
I’m personally not a fan of this practice and have never used it in any of my Amazon FBA businesses. But there are others who do. They use it to eliminate existing competition, capture a greater market share and increase the cost of entry.
So whether you like it or not, many Amazon FBA sellers use predatory pricing. Mainly those with a lot of capital. It is, therefore, important that you know what it is. So that you don’t become a victim.
How private label sellers use predatory pricing
Amazon FBA private label sellers use this pricing strategy to erect greater higher barriers to entry. They introduce a product and undercut their competitors, even if it means pricing below the cost of producing them.
This practice, in turn, increases their sales velocity, improves their sales history and increases their product feedback. These sellers also benefit from higher bargaining power because they have to buy large quantities. Meaning they can apply predatory pricing even more vigorously.
Then, once they have gained enough market share and some brand loyalty, they increase their price. And enjoy a
Resellers use predatory pricing too
Any established Amazon reseller who has been trading for many years is likely to use this strategy. Such a business will compete on price and keep undercutting until they have the Buy Box position. As a result, it will benefit from less competition, more sales, and higher seller feedbacks in the long-run.
This strategy works particularly well for big resellers because they have a lot of capital. They know that they can endure losses in the short-run while others can’t. And while some resellers can match and compete in the short term, they probably won’t be able to sustain making losses in the long-run.
Even when a big seller stops undercutting, it usually wins the Buy Box because it has better seller metrics.
Predatory pricing suits established Amazon sellers because they have thousands or more of positive seller feedbacks, huge portfolios of products and a lot more capital.
Conclusion
As you can probably tell, predatory pricing is beneficial for the consumer but not so much for the companies. Why? Because it promotes price wars and everyone loses.
But business is business. So I personally don’t have a problem with Amazon or Amazon sellers using predatory pricing.
If you are just starting out or if you are a smaller seller on Amazon, it’s important to understand what predatory pricing is and how it works. This will help you act accordingly when you come across sellers who do use this strategy.
My advice would be not to carry inventory you won’t be able to sell. In other words, do not try to compete with Amazon or other sellers who have a lot of capital and buying power in the first place. Full stop.
On the other hand, if you can afford to and have excellent seller metrics, you can use this pricing method to dominate a market and enjoy higher profits in the long-run. But just beware of its dangers because they can be devastating.