Penetration pricing is a marketing strategy that involves using competitive pricing to introduce a product to a new market or entice consumers to try it. Once established, the price is increased, and it can be used by new or established companies to capture market share or discourage competition.
Penetration pricing is a marketing strategy that involves using highly competitive pricing to introduce consumers to a new product or to introduce an older product to a new market. The idea behind this type of pricing technique is to entice consumers to try the product, find that they like it, and increase their desire to continue using the product. When the product is established in the market and accumulates a certain amount of market share, penetration pricing is abandoned for a pricing structure that is still competitive but provides a higher profit margin for the manufacturer.
The idea of penetration pricing is different from another technique known as price slashing. With the skimming approach, a product is introduced at a higher price than a lower price. An aggressive advertising campaign is typically used to raise customer awareness of the product and thereby generate some degree of interest. While sales tend to be a bit modest at first, the manufacturer makes a bigger profit with each unit sold. Once the advertising attracts consumers’ attention, the unit price is lowered to appeal to a broader consumer base, as well as increasing the chances that previous customers will recommend the product and its new lower price to others.
With penetration pricing, the idea is to generate sales among shoppers looking for bargains. The expectation is that once consumers try the product, their focus will be less on price and more on quality. After a reasonable period of time, the price is increased in small increments, with each increase’s impact on overall sales closely evaluated. When the price increases as much as possible without losing customers, the manufacturer generally identifies this price as the standard retail price and uses it as a base figure for promotions or special sales that may occur during the course of the year.
Companies that are new and trying to capture market share from established competitors may find that the penetration pricing approach is the fastest way to generate interest and start acquiring customers. Established companies can also use this strategy as a way to discourage others from entering the market and trying to attract consumers. For example, a large communications company that already generates a lot of sales may learn that another company is preparing to launch a new line of similar services. With more resources, the established company proactively uses penetration pricing not only to strengthen its ties with current customers, but also to gather new customers before the competition has a chance to launch its new line. As a result, the competitor may delay or completely abandon plans to launch the product line, since the potential to attract customers has significantly decreased.
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