2/28/2024 0 Comments Penetration pricing definition![]() The hope is that the sales volume will make up for the below-average cost. Penetration pricing is generally used when demand for a new product or service is projected to be high. Competitors have less time to respond before the company amasses market share and becomes the new standard of choice. The company sets a price that’s a bargain for its unique value, while still being cheaper than the familiar options. Price is removed as a barrier to get people to try the new product or service. If it’s an innovative product, this theory works the same way. ![]() After a period of growth, the business typically raises prices to increase profits and reflect the product’s rising value. Competitors' customers may switch over to the cheaper offer, and new customers buy in too. The initial price undercuts competitors, forcing them to match the offer or quickly apply other strategies. Penetration pricing is when businesses introduce a low price for their new product or service. The goal is to generate demand, rapidly build a customer base, and maximize brand loyalty in a short time. How does a penetration pricing strategy work?Ī penetration pricing strategy prioritizes market share over profits for a given time period. ![]() We’ll explain how it’s different from similar pricing tactics, provide examples, and cover the advantages and disadvantages of penetration pricing. Learn the ins and outs of using a penetration pricing strategy. Many high-profile startups have used this strategy to disrupt industries and become today’s market leaders. A penetration pricing strategy is built on this concept.īy entering the market with a low price, businesses aim to attract customers quickly - then gradually raise their price. For many consumers, nothing makes their buying decision easier than price. The low initial price can create an expectation of permanently low prices amongst customers who switch.New businesses rely on clear and powerful differentiators to stand out from the competition. Penetration pricing strategies do have some drawbacks, however: Sales volumes should be high, so distribution may be easier to obtain The low price can act as a barrier to entry to other potential competitors considering a similar strategy It forces the business to focus on minimising unit costs right from the start (productivity and efficiency are important) Encouraging word-of-mouth recommendation for the product because of the attractive pricing (making promotion more effective) Catching the competition off-guard / by surprise Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic – so a lower price than rival products is a competitive weapon.Īmongst the advantages claimed for penetration pricing include: However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified. ![]() In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. ![]() Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. The strategy aims to encourage customers to switch to the new product because of the lower price. Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The aim of penetration pricing is usually to increase market share of a product, providing the opportunity to increase price once this objective has been achieved. You often see the tagline "special introductory offer" – the classic sign of penetration pricing. ![]()
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