Definition of penetration pricing4/10/2024 Eventually, prices would drop to levels similar to market prices so as to capture the rest of the market. Essentially, producers are skimming the market in order to maximize profits. This strategy works perfectly for luxury or innovative products where early adopters are sensitive to low prices and would pay higher prices. Utilizing skimming, they sell products at exorbitant prices with really high margins. With penetration pricing, companies exhibit new products at affordable prices, with non-existent or modest margins. Skimming is the opposite pricing technique of penetration pricing. Additionally, supposing the low price is an aspect of an introductory campaign, curiosity might make customers pick the brand at the initial stage, but once the price starts rising or levels with a competitor, they might switch back to the competing brand. The main disadvantage is that an increased sales volume might not result in a profit supposing prices must remain low. Also, an increased amount of sales can result in lower production costs, as well as, quick inventory turnover. Often, it can increase sales volume and market share. Penetration pricing, synonymous with loss leader pricing, can be an effective marketing technique when applied correctly. The price attracts the customer to give the new product a try.īack to: MARKETING, SALES, ADVERTISING, & PR How does Penetration Pricing Work? A marketing strategy such as this depends on the concept of low prices making a customer informed if a new product. The lower price assists in luring customers away from competitors. Penetration pricing involves offering a low price for a new product or service during its first offering. Penetration pricing refers to a marketing strategy utilized by businesses for attracting customers to a brand new product or service. Update Table of Contents What is Penetration Pricing? How does Penetration Pricing Work? Penetration Pricing Versus Skimming Example of Penetration Pricing Academic Research on Penetration Pricing What is Penetration Pricing? Penetration strategy is also known as market penetration strategy. Differentiating with marketing, products, and distribution channels tends to have more long-lasting results. Of the preceding strategies, the use of price reductions and terms improvement tend to have the most ephemeral results, since they can be easily matched by competitors. If competitors do not sell through one of these channels, a company can gain market share for as long as there is no response to this strategy. For example, distribution could be through the Internet, retail stores, and street vendors. Distribution Channel Expansion StrategyĪ company can create a number of new ways in which to sell its goods into a market, thereby addressing a larger audience. It can take time for competitors to respond, giving a business the time to garner more market share. One of the better penetration strategies is product differentiation, where a company creates new products that are notably different from and better than those of competitors. If combined with no increase in product prices, the result can be a perception that a company's offerings are a bargain, resulting in additional market share. It also requires more funding to pay for receivables that are outstanding for longer periods of time.Ī company can spend more marketing funds on improving the branding of its products. This approach will likely allow the company to scoop up sales from the more financially unstable customers in a market, and can result in large bad debt losses. Terms Improvement StrategyĪ company can offer longer payment terms or a more generous product return policy. Also, lower prices may reduce customer perceptions of the value of a company's goods and services, so that a return to higher prices at a later date cannot be achieved. This approach is not a good one when competitors can easily match or exceed the company's lowered prices, thereby initiating a price war. However, this approach only works if its offerings are considered to at least have the median level of quality of competing offerings. If customers are price sensitive, they will respond by buying more of the company's products and services. The most common penetration strategy is simply to reduce prices. Key Performance Indicators Price Reduction Strategy The most common alternatives are noted below. There are a number of ways in which a business can engage in penetration strategy. Also, as the organization acquires more market share, this reduces the sales of its competitors, possibly forcing some to drop out of the market. The resulting increased sales volume typically allows a business to produce goods or obtain merchandise at lower cost, thereby allowing it to generate a higher profit percentage. Penetration strategy is the concept of taking aggressive action to greatly expand one's share of total sales in a market.
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