What is Penetration Pricing?
Penetration Pricing Strategy is a major marketing tactic of setting a relatively low price for a commodity with the goal of increasing sales or cross-selling potential buyers who will be drawn to the product or service in the long run. It means introducing the product at a low price with an intention to capture the mass market of the product or service and gain market share.
Understanding Penetration Pricing Strategy
For a certain timeframe, a penetration pricing strategy puts market dominance over profitability. In that short period of time, the objective is to increase demand, swiftly grow a potential audience, and maximize brand awareness.
How Penetration Pricing Works?
Companies use penetration pricing to offer a low price for a new commodity. The low starting price forces competition to match the offer or quickly implement different techniques. Consumers of competing companies may shift to the discounted offering, and new buyers may join as well. Following a time of expansion, the company often increases prices to maximize profits and portray the increased quality of the brand.
Popular Scopes for Penetration Pricing
When the market for a new product line is set to increase, penetration pricing is commonly applied. The aim is that the higher sales volume will compensate for the lower cost.
This principle holds true for innovative products as well. To encourage individuals to try new products/services, the price restriction is lowered. The firm establishes a price that is a steal for its particular quality while still being less expensive than the alternatives. Competing companies have very little time to take action before the business increases its customer base and establishes itself as the new norm.
Netflix is a perfect representation of how to work market penetration pricing and rise above other competitors in the market. Their pricing was set with the DVD rental practices of the 1990s and early 2000s in mind. Despite dominating the home entertainment market, Blockbuster was known for late fines and limited offerings compared to Netflix.
- Organizations or businesses use penetration pricing to draw consumers to a new product or service line by first providing a cheaper price.