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 attract a large customer base and gain market share. The goal is to establish the product or service in the market and create brand awareness, with the expectation that prices can be raised later once a dominant market position has been achieved.

5 Must Know Facts For Your Next Test

1. Penetration pricing is often used for new products or services to quickly build a customer base and establish the brand in the market.
2. The low initial price can help overcome customer resistance to trying a new or unfamiliar product, making it more appealing and accessible.
3. Penetration pricing can be an effective strategy for companies looking to disrupt an existing market or compete with established players.
4. The success of a penetration pricing strategy depends on the company's ability to maintain low costs and achieve economies of scale to sustain the low prices.
5. Penetration pricing can be a risky strategy if it leads to a price war or if the company is unable to raise prices later on to achieve profitability.

Review Questions

• Explain how penetration pricing relates to the marketing mix and the 4Ps of marketing.
  • Penetration pricing is a key element of the pricing component within the marketing mix (the 4Ps of marketing: product, price, place, and promotion). By setting a low initial price, the company aims to make the product more attractive and accessible to potential customers, thereby increasing product adoption and market share. This pricing strategy is often used in conjunction with other marketing mix elements, such as aggressive promotion, to drive demand and establish the product or service in the market.
• Describe how penetration pricing can be used as a marketing strategy during the different stages of the product life cycle.
  • Penetration pricing is most commonly used during the introduction stage of the product life cycle, where the goal is to rapidly gain market share and establish the product or service. By offering a low price, the company can attract a larger customer base and encourage trial and adoption. As the product moves through the growth and maturity stages, the company may gradually increase prices to maintain profitability, while still leveraging the established market position. Penetration pricing can also be used to defend against competition or to enter a new market segment, even for products in the decline stage of the life cycle.
• Analyze how factors contributing to the success or failure of new products, such as pricing, can influence the decision to use a penetration pricing strategy.
  • The success or failure of a new product is heavily influenced by its pricing strategy, which is a key factor in the marketing mix. Penetration pricing can be a crucial factor in the success of a new product by making it more affordable and accessible to a wider customer base, thereby driving adoption and market share. However, the decision to use a penetration pricing strategy must also consider other factors, such as the company's cost structure, the competitive landscape, and the long-term profitability goals. If the company is unable to sustain the low prices or if the strategy fails to achieve the desired market penetration, it can ultimately lead to the failure of the new product.

Related terms

Skimming Pricing: A pricing strategy where a company sets a high initial price for a product or service, targeting customers willing to pay a premium, before gradually lowering the price over time.

Price Discrimination: The practice of charging different prices for the same product or service based on factors such as customer demographics, location, or willingness to pay.

Market Penetration: The process of gaining market share within a specific market or industry, often through the use of a penetration pricing strategy.