![]() ![]() Your product is looking great, things are falling into place, and you’re almost ready for launch. I also love to read, write, learn, hike, swim, and travel! What is penetration pricing? Definition and pricing strategy examples It is a difficult approach for a smaller, resource-poor company that cannot survive long at the paltry margins provided by penetration pricing.Suhasini Gadam Follow With over a decade of experience, I help companies develop product and marketing strategies with a data-driven approach to grow revenue quickly in a scalable manner. This method is most useful for large companies that have sufficient resources to lower prices substantially and fight off attempts by competitors to undercut them. Instead, it loses even more money, because it reduced its prices so much. Price WarĬompetitors may respond with even lower prices, so that the company does not gain any market share. If a company reduces prices substantially, it creates a perception among customers that the product or service is no longer as valuable, which may interfere with any later actions to increase prices. If a company only engages in penetration pricing without also improving its product quality or customer service, it may find that customers leave as soon as it raises its prices. Branding DefenseĬompetitors may have such strong product or service branding that customers are not willing to switch to a low-price alternative. ![]() The following are disadvantages of using the penetration pricing method. It is possible to achieve a dominant market position with this strategy, though the penetration pricing may have to continue for a long time in order to drive away a sufficient number of competitors to do so. Reduces Competitionįinancially weaker competitors will be driven from the market, or into smaller niches within the market. If a company continues with its penetration pricing strategy for some time, possible new entrants to the market will be deterred by the low prices. The following are advantages of using the penetration pricing method. Competitors rapidly evacuate the market, and ABC becomes the dominant seller of blue one-armed widgets. Accordingly, it elects to enter the market at a $6.25 penetration price, which it feels comfortable maintaining for the foreseeable future. ABC has a large amount of excess production capacity, and so has an incremental cost of only $6.00 for the product. ![]() The current market price for a blue one-armed widget is $10.00. Example of Penetration PricingĪBC International wants to enter the market for blue one-armed widgets. This approach can work well in a mass market environment where large numbers of very similar products are sold, since it creates the opportunity for someone to drive down prices over very large production volumes. If a company obtains sufficient sales volume through this pricing strategy, it can become the de facto industry standard, which makes it easier to defend its position in the market.Ī business intent on following the penetration pricing strategy should have substantial financial resources, since it may incur significant losses during the early stages of this strategy. It is particularly likely when the new entrant has a product that it cannot differentiate from those of competitors in a meaningful way, and so chooses to differentiate on price. It is relatively common for a new entrant into a market to engage in penetration pricing, in order to grab an initial block of market share. Another reason is to use excess production capacity that the seller has available its marginal cost to produce using this excess capacity is so low that it can afford to sustain the penetration pricing for quite some time. Another reason is to obtain so much market share that the seller can drive down its manufacturing costs due to very large production and/or purchasing volumes. The first reason is to drive competitors out of the marketplace, so the company can eventually increase prices with little fear of price competition from the few remaining competitors. There are three reasons why someone would engage in penetration pricing. ![]() The price may be set so low that the seller cannot earn a profit. The low price is likely to attract price-sensitive customers. Penetration pricing is the practice of initially setting a low price for one's goods or services, with the intent of increasing market share. ![]()
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