Penetration pricing

Definition

Penetration pricing is a marketing strategy where a new product is introduced at a low price to attract customers and gain market share quickly. This approach aims to entice price-sensitive consumers and establish a foothold in the market, often leading to increased sales volume and brand loyalty over time. By setting a lower initial price, companies can also deter competition, making it a valuable tactic in highly competitive markets.

5 Must Know Facts For Your Next Test

1. Penetration pricing is often used for new products or services that are entering a competitive market where established players dominate.
2. This strategy can lead to short-term losses since the low price may not cover production and marketing costs initially.
3. Once the product has gained sufficient market share, companies may gradually increase prices to improve profit margins.
4. Penetration pricing can create a barrier for competitors, as they may find it difficult to compete with the lower prices offered by the new entrant.
5. Effective communication and marketing strategies are essential for penetration pricing to succeed, ensuring that consumers are aware of the new product's benefits.

Review Questions

• How does penetration pricing impact consumer behavior and purchasing decisions in a competitive market?
  • Penetration pricing significantly influences consumer behavior by attracting price-sensitive customers who may be reluctant to try new products at higher prices. The low initial price encourages trial purchases, allowing consumers to experience the product without significant financial risk. As customers become familiar with the brand and product quality, their likelihood of repeat purchases increases, fostering brand loyalty and establishing a solid customer base.
• Evaluate the potential risks and rewards associated with implementing a penetration pricing strategy for a new product.
  • Implementing penetration pricing carries both risks and rewards. The primary reward is gaining rapid market share and building brand recognition among consumers. However, the risks include the possibility of incurring losses during the initial phase due to low prices not covering costs. Additionally, there is the concern that customers may associate the low price with inferior quality or become resistant to price increases once they are accustomed to lower prices.
• Critically assess how penetration pricing can affect long-term profitability and competition within an industry.
  • Penetration pricing can have complex effects on long-term profitability and competition. Initially, it may lead to losses or reduced margins as companies prioritize market share over profits. However, if successful, it can establish a strong market position, allowing companies to increase prices later without losing customers. On the competitive front, penetration pricing can deter new entrants by making it difficult for them to match low prices without suffering financial strain, thus shaping the competitive landscape of the industry for years to come.

Related terms

Market Share: The percentage of an industry's sales that a particular company controls, reflecting its competitiveness in the market.

Price Elasticity of Demand: A measure of how much the quantity demanded of a good responds to a change in its price, indicating consumer sensitivity to price changes.

Competitive Pricing: A strategy where a company sets its prices based on what competitors are charging for similar products or services.