Pricing Strategies : Penetration 1.3.3

Penetration Pricing - Offering a significantly lower price than normal in an attempt to maximise volume sold and to build an installed base of loyal product users/customers

Example - Broadband companies or telephone companies e.g BT or Virgin

Involves setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price.

Penetration pricing is often used to support the launch of a new product and works best when a product enters a market with relatively little PRODUCT DIFFERENTIATION and when demand is ELASTIC - so a lower price than rival products is a competitive weapon.

☆THIS IS THE OPPOSITE OF PRICE SKIMMING☆

Aims:

• Gain market share quickly
• Build customer usage and loyalty
• Build sales of higher priced related items ("Hook and bait" approach)

Price can be increased once target market share is reached.

Penetration pricing is most commonly associated with a MARKETING OBJECTIVE of increasing market share or sales volume.

In the short term, Penetration pricing is likely to result in lower profits than would be the case if the prices were set higher.

However, in the long run, there are significant benefits to profitability of having higher market share, so the pricing strategy can often be justified.

ADVANTAGES

1) Catches the competition off guard/by suprise

2) Encouraging word-of-mouth recommendation for the product because of the attractive pricing  (making promotions more effective)

3) Minimising unit costs is a clear focus right from the start that the business is forced to do if it wants to use this strategy.

4) Low price can act as a barrier to entry to other potential competitors considering a similar strategy.

5) Sales Volume should be high, making distribution easier to obtain.

DISADVANTAGES

1) Creating expectation of permanently low prices from customers who switch by having a low inital price. It is always harder to increase prices than lower them.

2) Bargain hunter or loyal customer? It may be that the customer just wants a bargain, rather than becoming a loyal customer to the business and it's brand (repeat business)

3) Retaliation. This strategy is likely to result in retaliation from established competitors, who will try to maintain their market share.