Predatory Pricing

What is Predatory Pricing?

Predatory pricing is a pricing strategy where a company deliberately sets prices below its costs with the intent to drive competitors out of the market. Once competitors exit or weaken, the company raises prices to recoup losses and exploit reduced competition. This practice is generally illegal under antitrust law in most jurisdictions, though proving predatory intent can be difficult.

The strategy depends on the predatory firm having deeper financial reserves than competitors, allowing it to sustain losses longer than rivals can withstand. The expected payoff comes from eventual market dominance and the ability to set higher prices without competitive pressure.

Why It Matters for Billing and Revenue Teams

For RevOps professionals and finance teams, understanding predatory pricing is important for three reasons:

First, you need to recognize when your company might be facing predatory competition. Rapid, aggressive price cuts by well-funded competitors that don't align with normal market economics could signal predatory behavior rather than standard competition.

Second, your own pricing strategies must stay on the right side of antitrust law. Companies with significant market share face stricter scrutiny when pricing below cost, even for legitimate business reasons like new product launches or market entry.

Third, billing systems need flexibility to respond to competitive pressure without committing to unsustainable pricing. The ability to quickly adjust prices, create targeted offers, and track unit economics becomes critical during price competition.

How Predatory Pricing Works

The economic logic follows a straightforward pattern:

Phase 1: Below-cost pricing
The predatory firm prices products or services below their cost structure. This creates immediate losses but puts pressure on competitors who may lack the resources to match the low prices.

Phase 2: Competitor exit
Unable to sustain losses or match prices, competitors reduce their presence, exit the market entirely, or sell to larger players. Market concentration increases.

Phase 3: Price increases
With competition reduced, the predatory firm raises prices above previous market levels. The goal is to recoup earlier losses and earn monopoly profits.

The strategy requires three conditions: sufficient capital to sustain losses, competitors with weaker financial positions, and barriers that prevent new competitors from entering when prices rise.

Distinguishing Predatory Pricing from Legitimate Competition

Not all below-cost pricing is predatory. Many legitimate business strategies involve temporary losses:

Penetration pricing involves entering a new market with low prices to gain initial customers, then gradually increasing to profitable levels. This is legal and common, especially for new products.

Loss leaders are specific products priced below cost to attract customers who then purchase other profitable items. Retailers frequently use this tactic.

Promotional pricing offers temporary discounts to clear inventory, respond to seasonal demand, or match short-term competitor promotions.

Volume discounts reflect genuine economies of scale where marginal costs decrease with higher production or service delivery volumes.

The key difference is intent and pattern. Predatory pricing specifically aims to eliminate competition and requires a reasonable prospect of recouping losses through later monopoly pricing. Legitimate competitive pricing serves other business objectives without requiring competitor exit to succeed.

Legal Framework

Antitrust enforcement varies by jurisdiction but generally requires proving two elements:

Below-cost pricing: The company prices products below some measure of cost (usually average variable cost or average total cost, depending on the jurisdiction).

Recoupment potential: There must be a reasonable probability the company can later raise prices enough to recover its losses, which typically requires establishing market dominance.

In the United States, the Sherman Act and Robinson-Patman Act address predatory pricing. Courts apply the Brooke Group test, which requires showing both below-cost pricing and a dangerous probability of recouping losses.

The European Union takes a stricter approach under Article 102 of the Treaty on the Functioning of the European Union. Dominant firms pricing below average variable cost face presumption of predatory intent. Pricing below average total cost but above average variable cost can be illegal if anti-competitive intent is shown.

Implications for SaaS and Usage-Based Pricing

Software businesses face unique considerations around predatory pricing claims:

Marginal cost challenges: SaaS products often have near-zero marginal costs for additional users. This makes traditional cost-based tests difficult to apply, since almost any positive price exceeds marginal cost. Regulators may look at average total cost including development, infrastructure, and support.

Free tier complexity: Many SaaS companies offer free tiers as legitimate freemium strategies. These don't automatically constitute predatory pricing unless combined with other factors suggesting anti-competitive intent.

Usage-based pricing: When pricing by consumption, determining whether pricing is "below cost" requires analyzing specific usage patterns and infrastructure costs per unit of consumption.

Platform subsidies: Multi-sided platforms often subsidize one side (like consumers) while charging the other side (like merchants). This cross-subsidization is generally legal unless it's specifically designed to eliminate competition on the subsidized side.

Defending Against Competitive Pressure

Companies facing aggressive price competition have several options:

Differentiation: Focus on unique features, service quality, integrations, or vertical specialization that justify premium pricing regardless of competitor price moves.

Customer retention: Strengthen relationships with existing customers through success programs, long-term contracts, and value demonstration. Retained customers are less vulnerable to price-based poaching.

Cost efficiency: Improve operational efficiency to defend margins even at lower price points. Billing automation through platforms like Meteroid can reduce revenue operations costs.

Strategic partnerships: Form alliances with complementary vendors or industry players to expand value propositions beyond pure pricing.

Documentation: If you suspect predatory pricing, document competitor pricing patterns, market changes, and business impacts. This evidence becomes relevant if regulatory action or legal claims become necessary.

Financial reserves: Maintain sufficient runway to weather price competition without panic decisions. Price wars require staying power.

Billing System Requirements

Managing competitive pricing pressure requires billing infrastructure that supports:

Rapid price changes: The ability to modify pricing without engineering work allows quick responses to market conditions. Price versioning and grandfathering protect existing customers while adjusting new customer pricing.

Cost tracking: Real-time visibility into unit economics, customer-level profitability, and margin analysis helps determine which price points remain sustainable.

Flexible discounting: Structured discount management enables targeted responses to competitive threats in specific segments without across-the-board price cuts.

Contract management: Tools to manage commitments, automatically handle renewals, and provide flexibility around pricing terms become valuable when retaining customers under price pressure.

When to Seek Legal Counsel

Consider consulting antitrust counsel if:

• A dominant competitor suddenly prices well below apparent costs in your market

• Price cuts are targeted specifically at markets where you compete

• The competitor has publicly stated intent to eliminate competition

• You observe a pattern of price increases following competitor exits

• You're considering your own aggressive pricing strategy and hold significant market share

Predatory pricing cases are fact-intensive and require substantial evidence. Early legal guidance helps determine whether pursuing a claim makes sense.

Key Takeaways

Predatory pricing represents a specific form of anti-competitive behavior distinct from normal price competition. The strategy involves deliberate below-cost pricing to eliminate competitors, followed by price increases to exploit reduced competition.

For billing and revenue teams, the practical implications center on recognition, defense, and compliance. Recognize unusual competitor pricing patterns that might signal predatory behavior. Defend through differentiation, efficiency, and customer relationships rather than matching unsustainable prices. Ensure your own pricing strategies comply with antitrust law, especially if your company holds significant market share.

Sustainable competitive advantage comes from delivering genuine value, not winning price wars. Build products customers want to pay for, maintain efficient operations, and keep billing systems flexible enough to adapt to market conditions without compromising long-term viability.