Posted in Marketing and Strategy Terms, Total Reads: 1512
Definition: Market-penetration Pricing
As the name suggests, Market Penetration Pricing, is the mechanism in which the prices of the product are kept low at the start so that large sales volumes can be achieved. This is manly done keeping the price-sensitive customer in mind, who are higher in numbers and play an important part in the sales volume.
The ‘Market-penetration price’ guarantees- higher sales, shifting of customer base and most importantly the ‘Break-in’ in the market. So, later when the product establishes, a premium could be charged.
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.