Penetration pricing

Definition

Penetration pricing is a marketing strategy where a product is introduced at a low price to attract customers and gain market share quickly. This approach is often used by companies to establish a foothold in competitive markets, encouraging customers to switch from existing products or services. As market share increases, prices may be gradually raised once the product gains traction and brand loyalty develops.

5 Must Know Facts For Your Next Test

1. Penetration pricing can lead to rapid sales growth, allowing businesses to build brand recognition and customer loyalty quickly.
2. This strategy is particularly effective in highly competitive markets where customers have many alternatives to choose from.
3. By initially setting lower prices, companies can create barriers for potential competitors trying to enter the market.
4. Penetration pricing may involve initial losses as companies invest in marketing and production to gain market presence.
5. Once established, businesses may gradually increase prices without losing customers who have developed loyalty to the brand.

Review Questions

• How does penetration pricing affect a company's ability to gain market share in a competitive environment?
  • Penetration pricing helps companies gain market share by initially attracting customers with lower prices than competitors. This strategy encourages consumers to try the new product, leading to increased sales volume. As the company builds its customer base and brand recognition, it can create loyalty among consumers, making it easier to raise prices later without significant loss of sales.
• Evaluate the risks and benefits associated with using penetration pricing as a market entry strategy.
  • Using penetration pricing has both risks and benefits. The main benefit is the potential for rapid growth in market share and customer base, which can lead to long-term profitability. However, the risks include initial financial losses due to low pricing and possible difficulty raising prices later without alienating customers. Additionally, competitors may respond with their own aggressive pricing strategies, which could undermine the effectiveness of penetration pricing.
• Assess how penetration pricing relates to concepts like price elasticity and competitive dynamics in the market.
  • Penetration pricing is closely tied to price elasticity since it relies on consumers' sensitivity to price changes. If demand for the product is elastic, lowering prices can significantly boost sales volumes. In competitive dynamics, penetration pricing can alter market behavior; it may compel competitors to lower their prices or innovate their offerings. This interplay affects overall market stability and can lead to price wars, where companies continuously adjust prices in response to one another’s strategies.

Related terms

market share: The portion of a market controlled by a particular company or product, often expressed as a percentage of total sales.

price elasticity: A measure of how sensitive the quantity demanded of a good is to a change in its price, influencing how price changes affect consumer behavior.

skimming pricing: A strategy where a product is introduced at a high price point to maximize profits from segments willing to pay more, before gradually lowering the price.