Penetration pricing is a strategy used by companies to enter the market with low prices to quickly attract customers and gain market share. It contrasts with price skimming, targeting a broader audience with more affordable options. This approach can lead to rapid growth and economies of scale, as seen with Netflix and Android manufacturers. However, it also poses challenges such as potential price wars and the risk of being perceived as low quality.
Show More
Penetration pricing is a market strategy where a company introduces a new product at a significantly lower price than usual to quickly attract customers and secure a substantial market share
The primary objective of penetration pricing is to build a robust market presence swiftly and then incrementally increase prices to normal levels while maintaining the customer base
Penetration pricing is most effective in markets with elastic demand, where economies of scale can be realized, the market size is considerable, and competition is intense even after the product launch phase
Netflix's entry into the DVD rental market and its evolution into a subscription-based model is a notable example of penetration pricing
Android smartphone manufacturers have employed penetration pricing to offer affordable alternatives to Apple's premium-priced products, capturing a significant portion of the price-sensitive consumer market and achieving a substantial global market share
Penetration pricing is distinct from price skimming, which involves setting high initial prices for new products to maximize profits from early adopters who are less price-sensitive
Price skimming targets a niche market segment with higher prices and margins, while penetration pricing targets a wider audience by offering more affordable prices for generic consumer goods
While price skimming aims to capitalize on high margins at the beginning, penetration pricing focuses on acquiring a large volume of sales and establishing market dominance, with the prospect of raising prices over time
The advantages of penetration pricing include quick market share acquisition, heightened brand recognition, and the possibility of benefiting from economies of scale
Challenges of penetration pricing include reduced profit margins, the potential difficulty in increasing prices later, the risk of creating a perception of low quality, and the possibility of initiating price wars, which can lead to unsustainable business models
00
Definition of Penetration Pricing
Strategy of introducing a product at a low price to gain market share quickly.
01
Ideal Market Conditions for Penetration Pricing
Markets with elastic demand, potential for economies of scale, large size, and high competition.
02
Penetration Pricing Price Evolution
Start with low pricing, then gradually increase to normal levels while retaining customers.
