What is Penetration Pricing?
Penetration pricing refers to a pricing strategy that can be used by marketers to gain market share. Marketers implement this pricing strategy by initially offering low prices to attract customer, increase sale and positive brand image especially for the newly developed products and services.
Penetration pricing strategy is a price war between rivals in the industry where every company wants to cut the prices and remain the lowest in the market to capture the market share and develop customer loyalty.
This pricing strategy is generally used by companies who are new entrants in the market. When companies offer the lowest price for their offerings, customers will switch their loyalty towards the product. Penetrating strategy is very effective in the introduction phases of the product life cycle with no or little product differentiation.
There are certain situation where penetration pricing is very effective. The first situation when there is low level of product differentiation. Next is the price elastic of demand and last situation is the product or services suitability for the mass market.
Following the main objectives of using penetration strategy.
- To create brand awareness and loyalty
- To increase market share
- To switch customer loyalty
- To beat competitors in the market and industry
Skimming Price vs. Penetration Pricing
Skimming pricing strategy is opposite to the market penetration pricing. Marketers use penetration pricing to offer new products at low prices with fairly low profit margins. On the other hand marketers use skimming pricing strategy to offer products at high prices keep in mind the high profit margins. Skimming strategy is very effective for technological products where the demand is not consistent and customers are lower price sensitive and ready to pay higher prices.
If a business targets niche markets and offers differentiate products or services from its competitors can easily take advantage from skimming price strategy.
Examples of Penetration Pricing Strategies
Netflix (DVD rental and online streaming)
Few years back watching a movie at weekends was a tradition and people usually head towards a local video shop to rent a movie for the night. Netflix changed this tradition and convinced consumers to wait for a day or two to get their movies. Netflix offered subscription charges of one dollar where many video stores were charging upto 5 dollar. This introductory pricing strategy was very effective that damaged the traditional video providers such as Blockbuster. Netflix not only edged out many competitors but provided a whole new watching experience to viewers.
Samsung is continuously engaged in manufacturing android phones and keep the prices low to capture market share and develop brand loyalty. In addition to this, Samsung has also come in alliance with other mobile companies to offer Android-based phones at very low prices in exchange for commitments towards longer term contracts. Consumers fall in love with low priced phone and avoid to notice the contract cost.
Advantages of Penetration Pricing
Penetration pricing strategy creates a positive brand image in the minds of customers and become the referral group and create a world of mouth campaigns.
Since this pricing strategy increase market share as a result sales volume increases and production cost decreases.
Introductory low prices provide no or little time to competitors to react and retain its customers. This opportunity allows companies to switch customer loyalty.
Disadvantages of Penetration Pricing
When a company launch a product or service and offer introductory penetration prices, the customers expect everyday low pricing which is not the case. If the prices increases it can affect the customers’ expectations.
If a company has luxury product lines it is unable to use penetration strategy because it can affect the rest of the product lines that can leads to negative brand image. The Penetration pricing strategy is not always effective, for example, when a company target a low priced industry where prices are already low. In this case the existing companies have already built the trust of customers.