When it comes to defining price leadership, it can be said that it is a practice applied by a company (commonly, a leading organization) that fixes prices that are very much followed by its rival firms. Generally, such companies have the lowest production costs which is why they have the power to reduce the prices set by a rival company which endeavors to fix prices lower than the one set by the price leader i.e. the leading company. The rival companies can choose to fix higher prices than that of the price leader. In that case, they will have to experience reduced market share.
Price Leadership – A Quick Look at the Concept
This particular pricing strategy does not turn out to be beneficial for the consumers when the prices fixed by the price leader are much higher than what would have been given a standard competition level. On the other hand, when the price leader reduces the prices using its production volume and purchasing power, the consumers are highly benefitted. In that case, the competitors need to match the price set by the price leader as this will ensure their survival in the industry.
An implicit cooperation among the major competitors is required to make sure that the price leadership remains at a high price point. But, the situation is not the same when the price leader drops the price point because rival firms see no option other than going with the low price.
Circumstances in which Price Leadership Functions Best
Price leadership works perfectly when
- The competitors are ready to follow a company’s price leadership position.
- The small-scale rival businesses find no other option, but to follow the prices set by a company enjoying the largest market share in a particular industry.
- Companies are willing to follow the price leadership of a firm that has excellent expertise in identifying viable and valuable industry trends as they do not require investing resources to acquire that expertise. Here it is worth mentioning that this strategy is called barometric price leadership.
This strategic pricing strategy has its share of advantages and disadvantages.
Price Leadership – A Glance at its Plus Points
A company can gain an increased profit margin if it succeeds to fix high price points and the rival firms follow the price points.
Price Leadership – A Glimpse of its Minus Points
When a company implements this strategic pricing strategy, it will have to keep constant track of its rival companies and in case the competitors do not agree to follow the price leadership position of the company, it will have to take immediate steps. This is one of the biggest disadvantages of price leadership.
After years of savoring success with the price leadership position, a company may grow complacent. In the event of a price war, such firms may choose not to go for a lean cost structure.
Price leadership is not considered a viable pricing strategy since there can be only one price leader and there are a small number of companies that can go for this option. So, it is a wiser decision to find a feasible alternative.