Penetration Pricing
Penetration pricing is a marketing strategy where a product is initially offered at a low price to gain a foothold in the market. The goal is to attract customers and capture market share quickly. Once the product has gained traction, the price may be gradually increased. This approach is often used to compete with established brands or to introduce a new product.
8 Key excerpts on "Penetration Pricing"
eBook - ePub- Barney Kemps(Author)
- 2021(Publication Date)
- Bibliomundi(Publisher)
...Market Penetration Pricing A quick-entry price strategy that presumes that sales volume rise when an object is priced low which in turn reduces the overall costs is called market Penetration Pricing. This is a useful strategy that can be used in price sensitive markets. For example, consider the market for DVD players; this is a market where sales volumes are high, but the number of competitors is high as well. The production costs of DVD players have fallen drastically and constantly evolving technology has made allowance for the rapid introduction of new features and benefits on new models. The businesses that cash on DVD players and sell high volume at low or reasonable prices are all following a market penetration strategy. Entrepreneurs using market Penetration Pricing usually try to grow a market for their brand and in the process penetrate the market for the product as a whole. All calculations are based upon the assumption that the lowest price will win the largest share of the market. But it is very important to evaluate your market, your price sensitivity and your price elasticity or in-elasticity first before you use this pricing strategy. A certain amount of market research is also necessary in order for you to understand and prejudge how your competitors will react to this penetrating pricing strategy. For example, if your low price makes your competitor to lower price as well it will lead to a dead end as then you will lower your price again causing a similar reaction from him, and this will go on and no one will win. While what was said earlier is true, it is also true that your market Penetration Pricing strategy can just be a deterrent for new competitors who are considering entering the market...
eBook - ePubPricing and Profitability Management
A Practical Guide for Business Leaders
- Julie Meehan, Mike Simonetto, Larry Montan, Chris Goodin(Authors)
- 2011(Publication Date)
- Wiley(Publisher)
...market. 7 Management knew that, without a brand reputation or flashy ads to promote it, the company needed another attention-getter. Quality would also be a difficult attribute to tout when competing with traditional industry powerhouses like Sony, Samsung, and Panasonic. Soon though, skeptical customers were won over by the 40–50 percent price advantage of Vizio's products. Basically, the company used a Penetration Pricing strategy to take market share, establish itself as a major player, and build a brand reputation. 8 Penetration Pricing, also known as a low-price strategy, undercuts competitors and resets customer expectations over what products are worth. Useful in mature markets where competitive differentiation is difficult to achieve, price can substantially influence the purchase process. Southwest Airlines is another company that has employed this approach, much to the dismay of incumbents in the industry. 9 Maintaining a Penetration Pricing strategy can be risky if a business does not understand its financial position relative to its rivals. It must have a strong grasp of each competitor's margins, financial health, and competitive psyche. Are competitors likely to match the low prices or to surrender that part of the market? How critical are those products to the financial wellbeing of the competitors? Answering these questions will provide some insight into the expected reaction. A company must also understand its own financial state...
eBook - ePubThe Strategy and Tactics of Pricing
A Guide to Growing More Profitably
- Thomas T. Nagle, Georg Müller(Authors)
- 2017(Publication Date)
- Routledge(Publisher)
...Competitors always have the option of undercutting a penetration strategy by cutting their own prices, preventing the penetration pricer from successfully offering a better value. Only when competitors lack the ability or incentive to do so is Penetration Pricing a practical strategy for gaining and holding market share. There are three common situations in which this is likely to occur: When the firm has a significant cost advantage and/or a resource advantage so that its competitors believe they would lose if they began a price war. When the firm has a broader line of complementary products, enabling it to use one as a penetration-priced “loss leader” in order to drive sales of others. When the firm is currently so small that it can significantly increase its sales, beyond the breakeven level illustrated by the constant profit curve, without affecting the sales of its competitors enough to prompt a response. The telecommunications industry offers an illustrative example of successful Penetration Pricing. As regulators opened telecom markets to competition in most developed countries, new suppliers successfully used Penetration Pricing to capture market share. The low variable costs of carrying a call or message make such a strategy desirable. Regulatory constraints and the unwillingness of large, established competitors to match the lower prices of new entrants on their large installed base of customers enabled the strategy to succeed. Still, many telecom managers would question whether a heavy reliance on penetration strategies is sustainable indefinitely because it conditions some portion of the market simply to seek deals rather than good value. OPTION 3: NEUTRAL PRICING Neutral pricing involves a strategic decision not to use price to gain market share, while not allowing price alone to restrict it...
eBook - ePub- Geoffrey Lancaster, Lester Massingham(Authors)
- 2017(Publication Date)
- Routledge(Publisher)
...This strategy has been successfully carried out by firms marketing innovative products that have substantial consumer benefits. An example of price skimming was Apple’s iPod. Launched in 2005, the initial price was set at £450. It now is possible to purchase variants of the iPod for less than £100. After the initial introduction stage of the product the company will lower the price of the product in successive stage so as to draw in the more price-conscious customers. When a company adopts this strategy the following variables are usually present: • demand for the product is high; • the high price will not attract early competition; • the high price gives the impression to the buyer of purchasing a high-quality product from a superior firm. Price penetration is the setting of a low price or the following of a ‘market penetration strategy’ by companies whose prime objective is to capture a large market share in the quickest time period possible. Conditions that prevail in such circumstances include: • price sensitive demand for the product; • a low price that will discourage competitors from entering the market; • potential economies of scale and/or significant experience curve effects; manufacture has to be large-scale from the outset; • a manufacturer prepared to wait longer to recoup capital investment costs. Pricing in the growth stage: for a period of time after introduction the market will continue to grow. The fact that new companies are entering the market means the market will be divided between competing companies, but as the market is still growing new companies may not take any sales away from the innovator for some time. When new companies come into the market they tend to emphasize the non-product attributes of their product, as distinct from the behaviour of the innovator...
- Bonita M. Kolb(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...The two methods for pricing a new product are Penetration Pricing and price skimming. Some new products being introduced will have many competitors that people are already purchasing. In this case the challenge will be to get consumers to change their purchase behavior. They will need to be motivated to try the new product even though they may be happy with the product they are currently purchasing. One way to do so is to use Penetration Pricing, in which the market is penetrated through the use of a low introductory price. Even if this low price minimizes the profit that is made, it may be necessary to tempt consumers to try the product. After a predetermined period of time the price is raised so more profit can be made. While price sensitive consumers will stop purchasing, it is hoped that most consumers will be happy with the new product and will continue to buy even after the price is raised. Of course the penetration price should not be lower than the cost of producing the product or the organization will lose money. It should only be lower than the price that will be ultimately be charged to get the required profit. Price skimming, which is the opposite of Penetration Pricing, is introducing the product to the marketplace at a high price that will later be lowered. The two reasons for using price skimming are because the organization can and because it must. First, the new product can be priced high if the product will be highly desired by a particular segment of consumers and also has no competitors in the marketplace. If it is anticipated that there will be a strong demand for the product, consumers, particularly those who are early adopters and innovators and who use products to create their identity, will be willing to pay the higher price...
eBook - ePubReturn on Investment Manual
Tools and Applications for Managing Financial Results
- Robert Rachlin(Author)
- 2019(Publication Date)
- Routledge(Publisher)
...For example, a new product reaching a new selective audience has a different strategy than attracting buyers for other products as a loss leader. Also, gaining entry into new markets will differ from pricing in keeping with industry leaders. Each pricing strategy is designed to accomplish a different objective. These objectives will change as the marketplace changes and with changes in the life cycle of the product. A brief review of the various pricing strategies is presented. By no means is this the definitive discussion on pricing. The order in which these pricing strategies are presented has no relation to the importance or priority of the strategy. What follows is merely a listing of pricing strategies. High-price strategy is a technique whereby higher than usual prices are established on selected products. This can create an image for the buyer that the product is of higher quality as compared to those of competitors. This can be effective in the long run only if the product is, in fact, of higher quality than those of your competitors. Volume strategy accepts low-margin products with profits being generated from high volume. This is referred to as a “low-margin, high-volume” philosophy. Psychological pricing is pricing just below the round dollar amount, designed to create in customers’ minds the impression that the product is priced lower than it is. For example, $9.95, $25.99, and $99.99 appear to be lower than $10, $26, and $100. In-and-out pricing. Products are normally priced high, but price reductions occur when that segment of the market that is sought after becomes saturated. This strategy is effective only when there is limited or no competition and when substitutes for the product are almost nonexistent. Typical pricing strategy is generally established by the marketplace in that it is a price that is accepted by the customer as being a fair price...
eBook - ePub- Marilyn Stone(Author)
- 2007(Publication Date)
- Routledge(Publisher)
...Additional examples of price skimming can be found among high-priced products such as colour televisions, pocket calculators, digital watches and cameras, all of which have been characterized by skimming prices when they were introduced. Firms may decide to concentrate on maximizing the short-term money gains from price skimming when the company finds it is threatened by acquisition. In order to convince shareholders of the financial health of the organization, managers may increase prices to bolster profits. Prices often return to their former level once the threat of take-over has receded. Volume-related objectives Volume-related objectives are approached by what is known as Penetration Pricing. As the name implies, this pricing policy aims at penetrating the market as extensively as possible with the aim of recruiting the maximum number of customers. Often Penetration Pricing is found in manufacturing industries when production capacity needs to be fully utilized. Unless the firm has a large enough production capacity to cope with anticipated demand and can reduce costs, penetration is unlikely to succeed. The success of penetration will vary according to market conditions. In a mature market where expansion has slowed, there may be little point in buying market share. A penetration policy is more suitable in a growing market such as health drinks. Societal objectives Competition between firms battling for market share has the effect of driving prices down. But in some markets competition is limited by the sheer size of the enterprises concerned and it can be seen to be against the public interest. Statutory controls are brought to bear to prevent such situations from developing – such as antitrust law in the US or the activities of the Monopolies and Mergers Commission in the UK. Certain industries such as broadcasting, transport and public utilities are subject to watchdog bodies with advisory or regulatory powers...
eBook - ePubMarket Research in Practice
An Introduction to Gaining Greater Market Insight
- Paul Hague(Author)
- 2021(Publication Date)
- Kogan Page(Publisher)
...It can also set the expectation of further reductions in the future. A company that does not use its business objectives as the starting point for its pricing strategy will invariably get its pricing wrong and cause damage to its business. A summary of how different business objectives inform different pricing strategies is provided below. Table 20.4 Skip table Business objective Pricing strategy Definition of pricing strategy Maximize market share or revenue Penetration Pricing Pricing low to attract as many customers as possible Predictable revenue and profits Cost-plus pricing Adding a fixed amount to the cost of providing the offer Predictable revenue and profits Competitive pricing Basing prices on what the competition is charging Maximize profits Value pricing Pricing based on the customers’ perceived value of the offer Maximize profits and build exclusive brand Premium pricing Pricing high and possibly reducing supply in order to maximize margin per customer Maximize profits and provide customer choice Optional pricing Charge for basic offer and then for additional extras Maximize revenue Bundle pricing Offer discounts for buying more than one product or benefit Maximize profits Skimming pricing Start by charging a high price to those that are willing to pay it...
