A firm with a small market share can face aggressive local competition when using skimming. Penetration pricing approach is used to attain consumer attraction when market saturation condition is at its fullest. Whatever might be the strategy followed, pricing has to reflect the proper value in the eyes of the consumer.
The product that achieves high market penetration often becomes the industry standard such as Microsoft Windows and other products, whatever their merits, become marginalized.
This strategy is used by a firm that has customers with high transaction costs for one or more of its products. Over time, prices will reduce to levels comparable to market prices in order to capture the rest of the market.
Mostly, businesses adopt the method of aggressive or penetration pricing. Pricing decisions are complex in international marketing. Another potential disadvantage is that the low profit margins may not be sustainable long enough for the strategy to be effective.
Disadvantages of Penetration Pricing The biggest disadvantage of penetration pricing is that company is sacrificing the profit in initial phase when product is new and there is enthusiasm and demand from customers for the product. An important fact to be noted is that these products have to be related, in other words belonging to the same product family.
It measures the sales volume achieved by a product or a service in relation to the total market volume, i. A common solution to this problem is to set the initial price at the long-term market price, but include an initial discount coupon see sales promotion.
Why to focus Penetration Pricing Penetration pricing is based on the intention to appeal big ratio of price sensitive customers far away from other rivals already existing in the market. It is for the price elastic demand products; the products for which there is direct relation with the price and consumer value their money by charging low price by modifying the price for the same product.
This strategy is implemented by the marketers for achieving the high ratio of sale for their new product by keeping it economical. Penetration pricing is not ideal for those products which are technologically driven because the main idea behind this strategy is to create long term customer base and then charge premium prices from them whereas in case of technology it changes so fast that company will not have that luxury of charging premium from its customers at later stages of product life cycle.
Also, if the low price is part of an introductory campaign, curiosity may prompt customers to choose the brand initially, but once the price begins to rise or levels with a competing brand, they may switch back to the competitor.
It is probable to gain dominance in the market using this method; however, penetration pricing would have to persist for a long period to force away a substantial number of competitors.
Substantial economies of scale are available. When Netflix entered the market, it had to convince consumers to wait a day or two to receive their movies. In industries in which standardization is important. They find that, despite numerous recommendations in the literature for skimming or penetration pricing, market pricing dominates in practice.
It can be useful when there is a mass market and price sensitive customers. Another potential disadvantage is that the low profit margins may not be sustainable long enough for the strategy to be effective.
In most countries, predatory pricing is illegalbut it can be difficult to differentiate illegal predatory pricing from legal penetration pricing. The assumption in this strategy is that different market segments do not communicate or have different search costs and value perceptions of the product.
When clients see that prices are lower than normal, they may believe that they are getting an incredible deal on a quality item. The product is suitable for a mass market, with enough demand.
That way, the perceived price points remain high even though the actual selling price is low. Bundle Pricing Bundle pricing involves selling packages or set of goods or services at lower prices than they would have actually cost if sold separately.
Penetration pricing is the market concept adopted for a new product to be launched in a market with low prices, so that it may penetrate in the market and can gain its position among-st the rivals. This strategy is implemented by the marketers for achieving the high ratio of sale for their new product by keeping it.
A bottoms-up strategy lends itself to penetration pricing. Price low to minimize adoption friction, grow quickly, and then move up-market after developing broad adoption. Penetration pricing leads to land-and-expand sales tactics. Targeting the largest market segment within the range might be tempting, but maximizing volume doesn't necessarily maximize profits (see sidebar "Penetration pricing").
In particular, four aspects of new-product pricing may counsel against targeting the largest market, especially if doing so. Penetration pricing is a pricing strategy where the price of the product is initially kept lower than the competitors’ products to gain most of the market share and to trigger word of mouth marketing.
Penetration pricing is a pricing strategy where the price of a product is initially set low to rapidly reach a wide fraction of the market and initiate word of mouth. The strategy works on the expectation that customers will switch to the new brand because of the lower price.
Market penetration pricing is a strategy that is employed by most companies when introducing a new product in the market.
The price is usually lower so as to appeal to consumers.Market penetration pricing strategy