Price Leadership Strategy – Pros & Cons – Explained!

The word leadership can be traced back to an Old English word. That word is “laedere,” which means a person with the power to lead. When a group of people is working under a company or organization and trying to achieve a larger goal, the organization appoints some people known as leaders to the group members to guide them in the right direction so that they don’t go astray.

In this case, prime organizations capitalizing on the market share will set prices against the goods and services. For example, in the airline industry, those who capitalized the most market share are setting the price for their services, whereas other competitors should make them according to their changes.

Price Leadership – Meaning

Price leadership refers to an attractive strategy of a leader. However, pricing is essential to incorporate strategic decisions in the business. Therefore, price leadership is considered very effective in recent trade. When one company in an industry can set the standard for pricing in the market and then have its prices and price adjustments accepted by the rest of the market, this is called “price leadership. When a single firm manipulates the entire pricing range of the industry, then it would become difficult for such companies with poor market share.

Characteristics of Price Leadership

This leadership style is unique; however, some of its advantages are

• This leadership strategy mainly focuses on a sole form to control the pricing of the entire industry, and that particular company mostly has the market share of the company.
• As one company sets the price of the entire organization, there is no price war.
• This leadership style is mainly inserted in highly valued product or service industries, benefiting customers.
• Moreover, it refers to a particular industry that the customers most value, so it generates more profitability. For example, it might also refer to the telecom and airline industries.

Advantages of Price leadership:-

The advantages of any company tending to reduce costs in producing good quality products are –

• As long as demand is stable, all producers in a given market will benefit if firms follow a price leader by raising prices.
• It mainly refers to the high-value industry, so if the price is increasing still, the consumers are ready to pay the amount.
• In the case of price leadership, an organization might get an opportunity to get high profits, so organizations may spend such amounts on the research and development of renovating their goods and services.
• Moreover, since new products can be developed in this leadership, it might create an opportunity to acquire more customers in the future, which may increase profitability.
• It is to be remembered that when one firm sets the price and other firms, without objection, follow the same price range, it becomes easier for the industry to maintain a positive environment. It also helps to manage inductive growth for all existing companies.

Disadvantages of Price leadership:-

Some disadvantages can be noticed in this case, and they are-

• This leadership style mainly refers to such an industry, which is highly valued; therefore, organizations with a small value and poor market size cannot insert this approach.
• A company’s ability to establish and maintain price leadership is highly dependent on the precision with which it predicts the behaviors of its competitors and the depth of its understanding of market demand and supply. To compete with the market leader, followers may drop prices secretly if, for instance, the leader sets a price far higher than what the followers are ready to pay. Covert price reduction strategies include rebate and discount offers, easy access to credit, “money back” guarantees, free services after delivery, low-interest payment plans, etc. Given the current market dynamics, attempting to employ price leadership is pointless and unproductive.
• The inclination of competitors to engage in non-price rivalry to grow their sales while still charging the price established by the price leader is another disadvantage of retaining price leadership.
• A company’s ability to successfully lead the market in terms of pricing relies on its ability to accurately predict the responses of its competitors and understand the market’s demand and supply.

Historical Background

Businesses must adapt their competitors’ pricing strategies to succeed in any industry. “Price leadership” describes a scenario in which a dominant company or a firm is widely seen as the leader and determines pricing and price changes for the industry as a whole.

When a company sets the price at which the vast majority of its competitors sell their goods or services, it is said to have price leadership (one of the industry firms). Professor Heinrich von Stackelberg, a German economist, is credited with the development of this strategy. Further, it is divided into three parts such as barometric, collusion, and dominant.

How to implement Price Leadership?

In order to insert price leadership, there are specific steps that need to be followed,

1. Domination in the industry

A price leader exists when all of the other sellers in the market follow the lead company’s pricing policies. With such a large portion of the market and sway in the sector, the dominant corporation may dictate pricing across the board. When one company has so much sway in its business that it can set prices for all of its competitors, then that company has achieved price leadership.

2. Acquiring knowledge regarding the market

Businesses that command a sizable share of their industry’s buying population are often called “price leaders.” When the number of businesses in an industry is small, when new entrants face high barriers to entry, when goods are interchangeable, when consumer demand is inelastic or weakly elastic, and when firms have similar long-run average total costs, price leadership is more likely to develop (LRATC).

In economics, the Least Requirement Average Total Cost (LRATC) is a metric for determining the minimum (or lowest) average total cost at which a business may produce a given quantity of output (when all inputs are variable). In addition, the business must comprehend the price plan without compromising the necessities of the market.

3. Taking fast mover advantage

A company with price leadership always has a high market capital within the industry. However, the company sets pricing for the entire industry. Therefore, some small firms may only sometimes compete within these industries. In such circumstances, some medium, and lower-level companies may adjoin each other to fight against the price leader and try to capitalize on the market share. Therefore, the price leader should be ready to be a fast mover within the industry in the case of its strategic approach.

Example Of Price Leadership

The IT giant Apple is only one of several companies that have shown pricing leadership in the past. About 56% of the market share for smartphones shipped in the United States was held by Apple as of the fourth quarter of 2021. Samsung, its nearest competitor, had just a 22% market share.

Apple’s market dominance allows it to set its own pricing and determine the market’s reaction. For instance, the iPhone 12’s pricing dropped to $799 in 2021. So, to compete, Samsung made the Galaxy S21 available for the same price.

As an appropriate illustration of how a pricing leader affects others within its industry, Samsung lowered the price of the Galaxy S21 since the iPhone is so much more popular than the Galaxy S21.

Conclusion

From this study, this leadership mainly refers to such organizations which dominate the market size. Apart from that, to set the pricing in favor of an organization, it is required to have adequate information and a substantial market size to dictate the market. Otherwise, it is not possible in favor of an organization to stand and fight in this market.