Penetration pricing is the pricing technique of setting a relatively low initial entry price, a price that is often lower than the eventual market price. The expectation is that the initial low price will secure market acceptance by breaking down existing brand loyalties. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than short term profit maximization.
The advantages of penetration pricing to the firm are:
- It can result in fast diffusion and adoption. This can achieve high market penetration rates quickly. This can take the competition by surprise, not giving them time to react.
- It can create goodwill among the all-important early adopter segment. This can create valuable word of mouth .
- It creates cost control and cost reduction pressures from the start, leading to greater efficiency.
- It discourages the entry of competitors. Low prices act as a barrier to entry (see: porter 5 forces analysis).
- It can create high stock turnover throughout the distribution channel. This can create critically important enthusiasm and support in the channel.
- It can be based on marginal cost pricing, which is economically efficient.
Price Penetration is most appropriate when:
- Product demand if highly price elastic.
- Substantial economies of scale are available.
- The product is suitable for a mass market (ie.: sufficient demand).
- The product will face stiff competition soon after introduction.
- There is inadequate demand in the low elasticity market segment for price skimming.
- In industries where standardization is important. The product that achieves high market penetration often becomes the industry standard (eg.: Microsoft Windows) and other products, even very much superior products, become marginalized.
See also : pricing, marketing, microeconomics, production, costs, and pricing, business model, price skimming
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