Kamikaze pricing
1. What is “kamikaze pricing”?
Kamikaze pricing is an extreme form of penetration pricing. “Kamikaze” is a reference to World War II Japanese dive bomber pilots who would sacrifice their lives by crashing their airplanes, heavily loaded with explosives, onto enemy ships. Kamikaze pricing happens when the reasoning for penetration pricing is flawed because marketers wrongly assume lower prices will increase sales. However, in the business world, the continuous pursuit of increasing sales by lowering prices typically results in lower profitability.
2. When does the penetration strategy work?
The penetration strategy works when firms have a fixed cost structure and individual sales provide a large contribution to the fixed costs and can boost sales and provides large increases to profits. However, in order for this to be successful the market size must grow, and/or competitors choose not to respond. The penetration strategy also works well when firms have a large experience curve, which cause cost per unit to drop significantly. Also, the main component to successful penetration pricing is a large segment of customers who use price as their primary purchase motive.
3. How to avoid price war or “Kamikaze pricing”
In order to avoid increasingly aggressive price competition, managers must recognize the problem first and then develop alternative strategies that create distinctive competencies that are non-price related. Manager can create solutions to greater the competitive and profit positions of their firms without competing only on price. One opportunity that managers should consider in order to create differentiation is to have good customer service and support, allowing for customers to be more willing to pay more to suppliers even for commodities. Pricing wars and kamikaze pricing can also be avoided when marketers recognize the opportunity for higher prices of their product. In order for this to be effective they must understand how their
Kamikaze pricing is an extreme form of penetration pricing. “Kamikaze” is a reference to World War II Japanese dive bomber pilots who would sacrifice their lives by crashing their airplanes, heavily loaded with explosives, onto enemy ships. Kamikaze pricing happens when the reasoning for penetration pricing is flawed because marketers wrongly assume lower prices will increase sales. However, in the business world, the continuous pursuit of increasing sales by lowering prices typically results in lower profitability.
2. When does the penetration strategy work?
The penetration strategy works when firms have a fixed cost structure and individual sales provide a large contribution to the fixed costs and can boost sales and provides large increases to profits. However, in order for this to be successful the market size must grow, and/or competitors choose not to respond. The penetration strategy also works well when firms have a large experience curve, which cause cost per unit to drop significantly. Also, the main component to successful penetration pricing is a large segment of customers who use price as their primary purchase motive.
3. How to avoid price war or “Kamikaze pricing”
In order to avoid increasingly aggressive price competition, managers must recognize the problem first and then develop alternative strategies that create distinctive competencies that are non-price related. Manager can create solutions to greater the competitive and profit positions of their firms without competing only on price. One opportunity that managers should consider in order to create differentiation is to have good customer service and support, allowing for customers to be more willing to pay more to suppliers even for commodities. Pricing wars and kamikaze pricing can also be avoided when marketers recognize the opportunity for higher prices of their product. In order for this to be effective they must understand how their