key term - Penetration Pricing

Definition

Penetration pricing is a pricing strategy where a company sets a low initial price for a product or service in order to gain market share and penetrate the market. The goal is to attract customers and establish a customer base, often with the intention of raising prices later on once the product has become more established.

5 Must Know Facts For Your Next Test

1. Penetration pricing is often used to quickly gain market share and establish a brand in a new or highly competitive market.
2. The low initial price is meant to attract price-sensitive customers and undercut competitors, with the goal of building a loyal customer base.
3. Penetration pricing can be an effective strategy for products with high fixed costs and low variable costs, as the company can afford to charge a lower price initially.
4. Once the company has established a significant market share, it may gradually increase prices to maximize profits while retaining customers.
5. Penetration pricing can also be used to discourage potential competitors from entering the market, as the low prices make it difficult for them to compete effectively.

Review Questions

• How does penetration pricing relate to the concept of the marketing mix?
  • Penetration pricing is a key component of the marketing mix, specifically the 'price' element. By setting a low initial price, the company is using the pricing strategy to attract customers and gain market share. This pricing decision is then integrated with the other elements of the marketing mix, such as product, promotion, and place, to create a cohesive and effective marketing strategy for the business.
• Explain how penetration pricing can be used as an entrepreneurial marketing tactic.
  • For an entrepreneur, penetration pricing can be a powerful tool to help establish a new product or service in the market. By offering a low initial price, the entrepreneur can quickly attract price-sensitive customers and undercut competitors. This can be especially effective for entrepreneurs entering a crowded or highly competitive market, as the low prices can help the new business gain a foothold and build a loyal customer base. Penetration pricing aligns with the entrepreneurial focus on growth and market share, rather than immediate profitability.
• Evaluate the potential long-term implications of a penetration pricing strategy for an entrepreneurial venture.
  • While penetration pricing can be an effective short-term strategy for gaining market share, it can also have significant long-term implications for an entrepreneurial venture. The low initial prices may attract customers, but the company must be able to eventually raise prices to achieve profitability. If the company is unable to transition to higher prices, it may struggle to maintain financial sustainability. Additionally, a prolonged period of low prices can condition customers to expect low prices, making it challenging to increase prices later on. Entrepreneurs must carefully consider the long-term viability of a penetration pricing strategy and have a clear plan for transitioning to higher prices once the desired market share has been achieved.

Related terms

Skimming Pricing:

Skimming pricing is a strategy where a company sets a high initial price for a product or service in order to maximize profits from early adopters, before gradually lowering the price over time to appeal to a wider market.

Psychological Pricing: Psychological pricing involves setting prices at certain levels, such as $9.99 instead of $10, in order to influence consumer perception and purchasing behavior.

Competitive Pricing:

Competitive pricing is a strategy where a company sets its prices based on the prices of its competitors in the market, rather than solely on its own costs and profit margins.