What is Penetration Pricing?
Penetration pricing is a
marketing strategy where a company sets a low initial price for a new product to attract customers and gain
market share quickly. The primary goal is to attract a large number of customers and create brand recognition. Once the product has achieved a significant market presence, the company may gradually increase the price.
How Does It Work?
This strategy involves setting a price lower than the expected market price, often at a point where the company might incur a loss in the short term. The idea is to make the product appealing enough that consumers feel compelled to try it over competitors. By doing so, the company aims to build a substantial customer base swiftly.
Market Entry: It helps new entrants overcome barriers to
market entry by making their products more attractive than existing alternatives.
Volume Sales: Lower prices can lead to higher
sales volume, which can result in economies of scale and lower
unit costs.
Brand Loyalty: By attracting a large customer base early, companies can foster
brand loyalty and repeat purchases.
Competitive Advantage: It can be a way to disrupt competitors and capture market share quickly.
Profit Margins: Initial low prices may result in low or negative profit margins, which could be unsustainable in the long run.
Market Perception: Consumers may perceive the product as low quality due to its low price, impacting the brand's reputation.
Price Wars: Competitors may lower their prices in response, leading to a
price war that can erode profits for all players in the market.
Elastic Demand: When the
demand for the product is price-sensitive, lower prices can significantly boost sales volumes.
Large Potential Market: When the potential market size is large, the strategy can help capture a significant portion quickly.
Economies of Scale: When increased production volumes can lead to reduced costs, allowing the company to maintain low prices while achieving profitability.
Examples of Penetration Pricing
Several companies have successfully used penetration pricing strategies: Netflix: Initially offered its streaming service at a low price to attract subscribers, later gradually increasing the price as it expanded its content library.
Amazon: Used penetration pricing for its Kindle e-readers and Amazon Prime services to build a large customer base quickly.
Xiaomi: Entered the smartphone market with high-quality products at low prices to capture market share before raising prices as it established its brand.
Conclusion
Penetration pricing can be a powerful strategy for new market entrants or companies launching new products. While it offers the potential for rapid market share growth and customer acquisition, it also comes with significant risks that must be carefully managed. By understanding the market conditions and strategically leveraging this approach, businesses can effectively use penetration pricing to achieve their objectives.