Cost Breakdown of Destroyer: Explanation, Function, Uses, Advantages, Disadvantages
Destroyer pricing, also known as predatory pricing, is a tactic used by companies to gain a competitive edge by setting prices below cost, with the aim of eliminating competitors from the market. This strategy, while effective in certain scenarios, comes with its own set of risks and considerations.
In highly competitive retail or ecommerce markets, where many small or medium-sized competitors exist, aggressive undercutting of rivals' prices could force them out. Similarly, in emerging product markets or industries with high fixed costs and scale economies, a dominant player may afford temporary losses to achieve market control and then raise prices later. Technology or consumer electronics segments, where early market share capture provides strategic advantages, are also susceptible to this pricing strategy [1].
However, destroyer pricing is less effective or riskier in other situations. For instance, legal restrictions exist in some countries due to anti-competitive concerns. In industries where competitors have deep pockets or government backing, such as rare earth processing, state-backed players often dominate, making it challenging for companies adopting destroyer pricing to compete [2].
Product quality and brand reputation are crucial factors in industries like shipbuilding or defense, where cheaper cost strategies can harm long-term viability and safety. In these sectors, destroyer pricing may not yield the desired results [5].
Adopting destroyer pricing is a strategy implemented by companies to increase long-term profit and gain greater market power. However, it's important to note that this strategy bears losses in the short term, as the adopters set the selling price lower than the cost. A price war often ensues, with competitors trying to lower their costs and prices to retain customers [3].
In the short term, consumers benefit from lower prices and a wider choice due to the price war triggered by destroyer pricing. However, in the long run, the winner of the price war is likely to raise prices to cover losses, hurting consumers [4]. After eliminating competitors, the firm enjoys monopoly power and can increase prices to compensate for losses [6].
It's essential to understand that destroyer pricing is not always a foolproof strategy. For instance, Google Chrome overtook Windows Explorer despite Microsoft offering Windows Explorer for free, demonstrating that destroyer pricing does not always deter new entrants [7]. Moreover, adopters of destroyer pricing are vulnerable to losing the price war, as competitors may have extensive support from the parent company or large potential entrants may step in [8].
A comprehensive guide to pricing strategies can provide a deeper understanding of various pricing methods and their implications, helping businesses make informed decisions about their pricing strategies.
In some highly competitive markets such as retail or ecommerce, businesses may use destroyer pricing to eliminate rivals, exploiting their larger market share. Yet, in sectors where product quality and brand reputation are vital, like shipbuilding or defense, destroyer pricing could negatively impact long-term viability, making it an ineffective strategy.
While businesses can adopt destroyer pricing to gain long-term profit and market power, it entails short-term losses and a higher risk of triggering a price war, which might not always result in a complete elimination of competitors.
