Penetration pricing is a marketing strategy used by businesses to attract customers to a new product or service by offering a lower price when the company is new or when a new product is introduced. This method is frequently used to gain market share quickly by initially setting a low price to entice customers to buy.
Market penetration pricing is based on the strategy of initially charging low prices to make a large number of customers aware of a new product. Predatory pricing is an extreme form of penetration pricing. In general terms, price is a component of an exchange or transaction that occurs between two parties and refers to what the buyer must give up in order to obtain something offered by the seller.) The pricing decision is critical for most marketers, but the amount of attention given to this key area is often much less than that given to other marketing decisions.
The majority of the time, a customer’s perception of a product is formed as soon as they learn the price, such as when a product is first seen while walking down the aisle of a store. While the final decision to purchase may be based on the value offered by the entire marketing offering (i.e., the entire product), it is possible that the customer will not evaluate a marketer’s product at all based on price alone.
It is very much critical for marketers to understand whether customers are more likely to dismiss a product when all they know is its price. If it can be demonstrated that customers are avoiding learning more about the product because of the price, pricing may become the most important of all marketing decisions.
A price penetration strategy’s goal is to entice customers to try a new product and gain market share in the hopes of retaining the new customers once prices return to normal levels.
In today’s marketing environment, you can see various types of penetration pricing, such as a 50% discount on the introduction price or an online software vendor offering three months free for subscription-based software.
Penetration pricing helps companies to increase both market share and sales volume
Companies that use pricing penetration advertise new products at low prices with low or no margins. A skimming strategy, on the other hand, entails companies marketing products at high prices with relatively high margins.
Goal of Penetration Pricing
The important Goal of Penetration Pricing as follows
- Create Brand Awareness
- Gain market share
- Attract Customer from Competitors
- Expel competitors from the market
- Create significant demand on product
Advantage of Low Pricing
The following are the important advantage of penetration Pricing ?
High inventory turnover: Penetration pricing increases inventory turnover, which pleases vertical supply chain partners such as retailers and distributors.
Widespread adoption and diffusion: Penetration pricing allows a company’s product or service to be quickly accepted and adopted by customers.
Succeed in Competition: A penetration pricing strategy typically catches competitors off guard and gives them little time to respond. The company can take advantage of the opportunity to convert as many customers as possible.
Increased Goodwill: Customers who find a good deal on a product or service are more likely to return to the company in the future. Furthermore, increased goodwill generates positive word of mouth.
Disadvantages of Penetration pricing
When you set a penetration price for a product, there are some disadvantages also. The main disadvantage is that it will initiate a price war in the market. This price war reduces overall market profitability, and the only companies strong enough to survive a protracted price war are usually not the new entrant who started it. ERP Software Like Fortuner provides best functionalities to determine the suitable price for a product in the market.
Another disadvantage of this method is that it can sometimes decrease customer loyalty.
Pricing decisions made hastily without adequate research, analysis, and strategic evaluation can result in revenue loss for the marketing organization. Prices that are set too low may result in the company losing out on additional profits that could be earned if the target market is willing to pay more for the product.
Pricing decisions must be flexible, especially when the marketer wants to stimulate demand quickly or respond to competitor price actions.
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