Definition
Penetration pricing is a marketing strategy used by businesses to attract customers to a new product or service by initially offering a lower price. This approach is designed to maximise customer base swiftly and deter competitors. The prices are usually increased once a sizable market share has been secured.
Key Takeaways
- Penetration Pricing is a pricing strategy used by businesses, particularly new entrants, where the price of a product or service is initially set lower than the eventual market price to attract customers away from competitors.
- The primary purpose of this strategy is to attain a significant market share, generate a high volume of sales and therefore achieve economies of scale. As the customer base grows, companies can then raise prices gradually.
- Penetration pricing is effective in a competitive market but may risk financial loss initially due to the low pricing. Moreover, a sudden increase in prices after market penetration might lead to customer loss if not properly managed.
Importance
Penetration pricing is an important financial term and strategy used by businesses aiming to break into a competitive market or launch a new product. The main goal of penetration pricing is to attract customers by setting lower prices initially, to stimulate market adoption and customer awareness of a product or service, as opposed to competitors who may be charging higher prices.
Its importance lies in its ability to help companies establish market share and increase their customer base quickly. However, this approach requires careful planning as lower prices often mean reduced profit margins.
Despite this, with suitable volume or market share, the losses may be offset resulting in overall profitability. Hence, penetration pricing is a critical strategy for businesses seeking growth in a new market or with a new product.
Explanation
Penetration pricing is a strategic method utilized by businesses seeking to establish a strong market presence for a new product or service. The primary objective of this approach is to capture a significant market share rapidly.
This is achieved by setting an initially lower price for a product or service to attract a large number of customers. The method is particularly useful in a competitive marketplace where the consciousness of price plays a significant role in consumer behavior.
The effectiveness of penetration pricing lies in its ability to entice consumers to switch from existing brands to try out the new product offering. As consumers are generally price sensitive, an affordable price tag has the potential to persuade a considerable number of buyers to test the new product.
After achieving the targeted market penetration, companies often gradually increase prices. This serves two-fold; it allows room for price adjustments based on market reaction and builds consumer loyalty through initial lower pricing.
Examples of Penetration Pricing
Streaming Services: When Netflix launched its streaming service, it initially offered lower prices as compared to other cable TV subscriptions. This allowed them to attract a significant number of users who were reluctant to pay high prices for cable TV. Over time, as their customer base grew and their content offerings improved, Netflix has periodically raised its pricing.
Smartphone Market: When Chinese smartphone companies like Xiaomi and Oppo entered the market, they used a penetration pricing strategy by offering high-quality phones at much lower prices than their competitors like Apple and Samsung. This allowed them to quickly gain a substantial market share.
Fast Food Industry: International fast food chains like McDonald’s and KFC when they enter emerging markets price their meals and combos less than the other local competitors to attract customers. Once they have captured a sizeable customer base, they start to gradually increase their prices, having gained the loyalty and brand recognition among consumers.
FAQ: Penetration Pricing
What is Penetration Pricing?
Penetration Pricing is a marketing strategy commonly used by businesses to attract customers when a new product is introduced in the market. It involves setting a low initial price to lure customers, then gradually increasing the price as the product gains market share.
What is the main goal of Penetration Pricing?
The main goal of Penetration Pricing is to increase market share or sales volume. This is done by undercutting competitors on price, making it an attractive option for price-sensitive customers.
What are the advantages of Penetration Pricing?
The advantages of Penetration Pricing strategy include quick market penetration and customer acquisition, discouraging competition, and potentially creating customer loyalty due to initially low prices.
What are the potential drawbacks of Penetration Pricing?
Potential drawbacks of Penetration Pricing can include low profit margins due to the initially low pricing, customers could feel betrayed when prices are raised, and if not managed carefully, it may result in a price war with competitors.
Is the Penetration Pricing strategy applicable to all businesses?
Not necessarily. Penetration Pricing is best suited for large-scale markets where the goal is to achieve a significant market share quickly. For businesses operating in a niche market, this strategy may not be as effective.
Related Entrepreneurship Terms
- Market Penetration
- Price Elasticity
- Competitive Pricing
- Economies of Scale
- Marketing Strategy
Sources for More Information
- Investopedia: A leading finance and investment source offering a comprehensive encyclopedia of terms, tutorials, articles, and more. Investigate penetration pricing at Penetration Pricing.
- Entrepreneur: A popular platform for entrepreneurship, small business management, and business. Check out their article about penetration pricing at Penetration Pricing.
- Cleverism: A comprehensive guide on business concepts and strategies. Explore penetration pricing at Penetration Pricing Strategy.
- Accounting tools: A resource providing clear explanations of accounting and finance concepts. Explore details on penetration pricing at Penetration Pricing.
