Posted in Marketing and Strategy Terms, Total Reads: 543
Definition: Price Penetration
This type of strategy involves pricing a product low so as to attract customers towards the brand. So the main aim is not to maximize profits but to increase market share. This initial low price will eventually be raised to a higher value once a sufficient number of customers has been induced to switch over to the brand, i.e., once a significant market share has been captured.
Some of the advantages of market penetration pricing are:
• Competitors can be taken by surprise, and they get very little time to react.
• Loyalty can be created among customers who will then attract more people by word-of -mouth
• Low prices can ward off new competitors by acting as entry barriers
• High inventory turnover will create a positive buzz in the distribution channels
However, there are certain disadvantages as well:
• It may create a negative impression about the brand and/or the company
• Customers may come to expect significant cost savings throughout their association with the brand; as soon as the company decides to raise the price, these customers may leave, thus depleting the market share
• Low margins may make the campaign unsustainable over the long run
Thus companies face the dilemma as to whether to raise the prices drastically in one single stroke or in a gradual and phased manner over a couple of years so that customers do not notice or are not that bothered. There are also companies which price the product at the eventual price but give a discount coupon as a promotional strategy.
This strategy will be especially relevant in cases where significant economies of scale are possible, when the product is highly price elastic or the product has a very high demand.