What Is Penetration Pricing ?
A pricing strategy where companies offer lower initial price while
launching a product or service is called penetration pricing. It is a short
term strategy firms use attract potential customers and increase
sales.
In this post we are going to highlight some major pros and cons of
penetration pricing.
Advantages Of Penetration Pricing
The main merits or advantages of penetration pricing technique are as
follows:
1. Attracts More Customers
Penetration pricing offers lower price than existing companies in the
market. It helps to attract more customers that increases the sales volume.
So, it is helpful for the new companies to win customers from rivals and
expand market share.
2. Economic Advantages
Because of increased sales, company increases the volume of production. It
helps to lower the cost of production. In this situation, company can enjoy
the benefit of economies of scale due to large scale production.
3. Easy Market Entry
Another advantage of penetration pricing is that it helps the firm to
compete with the rival companies in the market. Company can easily enter in
the new market because of lower product price. On the other hand, it
discourages new entrants to enter the market.
4. Increase Brand Loyalty
It helps to increase brand loyalty by providing quality goods at lower
price. It helps to increase customer trust and satisfaction.
5. Increase Goodwill And Image
Because of customer trust and brand loyalty, it helps to improve the
goodwill and image of the firm.
Disadvantages Of Penetration Pricing
The main demerits or disadvantages of penetration pricing strategy are as
follows:
1. Short-term Strategy
Penetration pricing is a short term strategy used by the firms to enter the
market to launch new product. So, it is not viable in the long-run.
2. Not Suitable For Small Firms
Small firms having fewer financial resources and lower production capacity
cannot adopt this pricing method because it lowers the profit margin.
3. Possibility Of Price War
Another disadvantage or drawback of penetration pricing is that it
increases the chance of price war in the market. So, it may create unfair
price competition.
Also Read
4. Difficult To Raise Price
It becomes difficult for the company to increase the price of the product
because customer may switch back to previous brands if company raises the
price.
5. Poor Brand Image
Penetration pricing may hurt the brand image because low price may make
people think that the product is of low quality or cheap.
Pros And Cons Of Penetration Pricing In Brief
Pros
* It attracts large audience that increases sales and market share
* It limits competition in the market
* It creates economies of scale
* It improves brand loyalty, goodwill and image
* It increases inventory turnover
Cons
* It is suitable only for short term and it cannot be adopted by small businesses
* Requires huge initial investment
* May lead to poor consumer experience
* It may create price war
