Penetration
Pricing
The advantages of penetration pricing to the firm are:
 It can
result in fast diffusion and adoption. This can achieve high market
penetration rates quickly. This can take the competition by surprise,
not giving them time to react.
It can
create goodwill among the all-important early adopter segment. This
can create valuable word of mouth.
It creates
cost control and cost reduction pressures from the start, leading to
greater efficiency.
It discourages
the entry of competitors. Low prices act as a barrier to entry (see:
porter 5 forces analysis).
It can
create high stock turnover throughout the distribution channel. This
can create critically important enthusiasm and support in the channel.
It can
be based on marginal cost pricing, which is economically efficient.
Penetration pricing is the pricing technique of setting a relatively
low initial entry price, a price that is often lower than the eventual
market price. The expectation is that the initial low price will secure
market acceptance by breaking down existing brand loyalties. Penetration
pricing is most commonly associated with a marketing objective of increasing
market share or sales volume, rather than short term profit maximization.
The main disadvantage with
penetration pricing is that it establishes long term price expectations
for the product, and image preconceptions for the brand and company.
This makes it difficult to eventually raise prices. Some commentators
claim that penetration pricing attracts only the switchers (bargain
hunters), and that they will switch away from you as soon as you increase
prices.
Price Penetration is most
appropriate when:
-
Product demand is highly
price elastic.
-
Substantial economies
of scale are available.
-
The product is suitable
for a mass market.
-
The product will face
stiff competition soon after introduction.
-
There is inadequate demand
in the low elasticity market segment for price skimming.
In industries where standardization
is important. The product that achieves high market penetration often
becomes the industry standard and other products, even superior products,
become marginalized. Standards carry heavy momentum.
An interesting variant
of the price penetration strategy is the bait and hook model (also called
the razor and blades business model) in which an initial product is
sold at a very low price but subsequently purchased products (such as
refills) are sold at a higher price. This is an almost universal tactic
in the desktop printer business, with printers selling for as little
as $100 and including two ink cartridges, which cost $30 each.
Taken to the extreme, penetration
pricing becomes predatory pricing, when a firm initially sells a product
at unsustainably low prices to eliminate competition and establish a
monopoly. In most countries, predatory pricing is illegal, although
it can be difficult to distinguish predatory pricing from penetration
pricing.
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