Penetration pricing is a marketing strategy that involves using competitive pricing to introduce a new product to consumers or a new market. Once established, the pricing is adjusted to provide a higher profit margin. This differs from price skimming, where a product is introduced at a higher price before being lowered to appeal to a wider consumer base. Penetration pricing is used to generate sales among bargain-hunting consumers, with the expectation that they will focus on quality over price. This strategy can be used by new or established companies to capture market share or discourage competitors.
Penetration pricing is a marketing strategy that involves using highly competitive pricing to introduce a new product to consumers 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 what they like, and increase the desire to continue using the product. One that the product is established in the market and has built up a certain amount of market share, the penetration pricing is dropped 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 skimming. With the skim approach, a product is introduced at a higher price rather than a lower one. An aggressive advertising campaign is normally used to raise customer awareness of the product and thus generate a certain degree of interest. While sales tend to be quite modest to begin with, the manufacturer earns a larger profit from each unit sold. Once the advertisement has captured consumers’ attention, the unit price is then lowered to appeal to a larger consumer base, while also increasing the chances that previous customers will recommend the product and its new, lower price point to others.
With penetration pricing, the idea is to generate sales among bargain-hunting consumers. The expectation is that once consumers try the product, their focus will be less on price and more on quality. After a reasonable amount of time, the price is increased in small increments, with the impact of each increase on overall sales carefully assessed. When the price is raised as high as possible without losing customers, manufacturing usually identifies that price as the standard retail price and uses it as the base value for any promotions or special sales that may occur during the year.
Companies 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 to discourage others from entering the market and attempt to attract consumers. For example, a large communications company already generating a large volume of sales might learn that another company is preparing to launch a new line of similar services. With more assets, the established company proactively uses penetration pricing to not only strengthen ties with existing customers but also to bring together new consumers before the competition has a chance to launch their new line. As a result, the competitor may delay or abandon product line release plans entirely, as the potential to attract customers is significantly diminished.
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