In figuring out the price of a product or service, there are lots of factors that can impact. Pricing is calculated in such a way that it can generate profits for the seller. In business, this is known as limit pricing or limit pricing.
What is limit price or limit pricing?
What is limit price or limit pricing? The process of setting a limit price or limit pricing is a pricing strategy that usually occurs in a monopolistic business strategy. In this practice, a seller or distributor sets a very low price to reach below the market price.
This very low price can cause potential competitors to lose their ability to enter the market because they cannot provide lower prices.
In this limit pricing strategy, the company did not get the maximum profit. However, this is done to be able to get rid of competitors from the market so they can still reap a lot of profits. This strategy can also trigger other companies to be unwilling to enter this competition. Nevertheless, this is illegal in some nations.
Example of Limit Pricing
To better comprehend limit pricing, here is one example of limit pricing that can occur in everyday routine. For instance, in a country, business A and company B are two companies that make the same product. Company A has already entered the market for marketing its items.
After some time, company B is ready to issue a product similar to that of company A. However, it seems that company B sells the product at a very low price and has a very low profit margin. As a result, company B will have difficulty getting into the market if it lets out a product that is more expensive than firm A.
This caused company B to be hesitant to launch the item. Company A will continue to gain customers and profits because there are no competitors in the field. Consumers or buyers of company A’s products also have no other option because there are no other companies that sell these items.
Is Limit pricing an illegal act?
The existence of limit pricing practices can get rid of competition and cause monopolies. In some nations, this is illegal.
Some countries have certain legal rules in determining the price of goods so that they can prevent the practice of limit pricing. In these countries, companies that are caught doing limit pricing can be prosecuted accordingly.
Decreasing the company’s profit margins
Companies that implement the limit costs technique will certainly have lower profit margins. Production costs and capital needed will certainly be the same. If the selling price is lowered, the company’s profit margin will also be reduced. The profits that should have been obtained by the company also eventually did not become maximal.
Advantages of Limit Pricing
As one of the techniques that can be applied in determining the price of an item or service, limit pricing does have a benefit. For perpetrators of limit pricing, this practice can reduce competition. If competitors can be decreased, then the company can get more consumers and of course will get even more profits or profits.
The price of goods or services that are too cheap will result in a monopoly. This is because not all companies can provide very cheap prices. This certainly causes most competitors to be excluded from the market play.
Customers can get cheap goods:
For consumers, the existence of limit pricing can sometimes also be beneficial. Consumers can simply get products at very cheap prices, even less expensive than the normal market price. In this case, consumers are among the very beneficiaries.
Limit Pricing Cons
Even though it can provide advantages for the culprit, the limit pricing can indeed offer some drawbacks. These losses are mainly felt by other parties such as competitors or consumers. The following are some of the losses that can arise as a result of limit pricing:
The emergence of excessive self-satisfaction
Successful limit pricing in generating profits and removing competitors may lead to excessive self-satisfaction for the perpetrators of the organization. The company may not pay too much attention to the costs because they feel they have received a sizable profit.
Even so, the company also can’t prepare well if a competitor company can offer a much better product or even issue a product at a lower price. When this happens, the company will have more trouble keeping its income. Due to this factor, limit pricing is regarded as more rewarding if done for a short period of time.