Penetration Pricing

What Is Penetration Pricing?

Penetration pricing is a marketing strategy utilized by organizations to draw in customers to another product or service by offering a lower price during its initial offering. The lower price assists another product or service with entering the market and draw in customers from contenders. Market penetration pricing depends on the strategy of utilizing low prices initially to make a wide number of customers aware of another product.

The goal of a price penetration strategy is to tempt customers to attempt another product and build market share with the hope of keeping the new customers once prices rise back to normal levels. Penetration pricing models incorporate an online news website offering one month free for a membership based service or a bank offering a free checking account for quite some time.

Understanding Penetration Pricing

Penetration pricing, like loss leader pricing, can be a fruitful marketing strategy when applied accurately. It can frequently increase both market share and sales volume. Furthermore, a higher measure of sales can lead to lower production costs and fast inventory turnover. Nonetheless, the key to a fruitful campaign is keeping the recently procured customers.

For instance, a company could promote a buy-one-get-one-free (BOGO) campaign to draw in customers to a store or website. When a purchase has been made; preferably, an email or contact list is made to follow-up and offer extra products or services to the new customers sometime in the not too distant future.

Nonetheless, in the event that the low price is part of a basic campaign, interest might provoke customers to pick the brand initially, however when the price starts to rise to or close to the price levels of the contending brand, they might switch back to the contender.

Subsequently, a major impediment to a market penetration pricing strategy is that an increase in sales volume may not lead to an increase in profits on the off chance that prices must stay low to keep the new customers. In the event that the competition likewise lowers their prices, the companies could wind up in a price war, leading to lower prices and lower profits for an extended period of time.

Penetration Pricing versus Skimming

With pricing penetration, companies publicize new products at low prices, with unassuming or nonexistent margins. On the other hand, a skimming strategy includes companies marketing products at high prices with generally high margins. A skimming strategy functions admirably for creative or luxury products where early adopters have low price sensitivity and will pay higher prices. Actually, producers are skimming the market to amplify profits. After some time, prices will reduce to levels comparable to market prices to capture the remainder of the market.

Small organizations or those in niche markets can benefit from price skimming when their products or services are separated from contenders' and when inseparable from quality and a positive brand picture.

Illustration of Penetration Pricing

Costco and Kroger, two major supermarket chains, use market penetration pricing for the organic food sources they sell. Generally, the margin on regular food items is negligible. In any case, the margin on organic food varieties will in general be higher. Additionally, the demand for organic, or natural, food sources is becoming fundamentally quicker than the market for non-organic food. Therefore, numerous merchants offer greater determinations of organic food sources at premium prices to support their profit margins.

In any case, Kroger and Costco utilize a penetration pricing strategy. They are selling organic food sources at lower prices. Successfully, they are utilizing penetration pricing to increase their wallet share. While this strategy might be risky for small supermarkets, economies of scale permit Kroger and Costco to utilize this strategy. Economies of scale basically means that bigger companies can offer lower prices since they buy their inventory in bulk at a volume discount. The lower costs allow Kroger and Costco to keep up with their profit margins even while undermining the pricing of their competition.

Highlights

• Penetration pricing is a strategy utilized by organizations to draw in customers to another product or service by offering a lower price initially.
• The lower price assists another product or service with infiltrating the market and draw in customers from contenders.
• Penetration pricing accompanies the risk that new customers might pick the brand initially, however when prices increase, switch to a contender.