Penetration Pricing Strategy: Definition, advantages, and disadvantages with examples.

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What is Penetration Pricing Strategy?

Penetration Pricing is a marketing strategy employed by businesses to attract customers while launching new products or services in the market. The product is offered at a lower price which helps the product to “penetrate” the market and also look appealing to the customers.

Companies may use this strategy to garner a larger chunk of the market audience and cut their competitors’ market share during the initial stages of the launch itself. This way, when a large group of customers has tried their product, they may hike their prices and still keep a majority of those customers.

The companies must also make sure while employing this plan that they have a clear roadmap for compensating these low prices in the long term. If not, this oversight may come back to haunt them later.

Advantages of Penetration Pricing Strategy

  • Penetration Pricing Strategy provides market dominance for a product at its initial stages. Naturally, if a product or service is being offered at a lower price than other similar products in the market, the customers are bound to be attracted to it. If the product matches the expectations of the customers, they may even stick to it after the prices are reverted to their normal levels, which is the whole point of this strategy.
  • Customers are able to find a bargain on a product, which they had been paying for heavily earlier. By starting at lower inexpensive price rates new businesses can build goodwill with a large number of consumers. This creates a positive atmosphere around the product and even increases customer loyalty.
  • Penetration Pricing Strategy requires a high sales quantity. This could enable a firm to realize economies of scale and also keep a check on its marginal costs.

Disadvantages of Penetration Pricing Strategy

  • Customers may expect low prices permanently. Hence, when the business decides to eventually go back to the normal prices of the products, the customers may be dissatisfied, and as a result, may stop purchasing the product.
  • Penetration Pricing Strategy demands a lot of loyalty from the customers, which can be very difficult in the current market. This strategy is more likely to attract bargain hunters who may switch to any better deal that they get from any of the competitors in the market.
  • Low prices could make the customers assume the brand to be of cheap or low quality. This could hamper the image of the brand significantly which would make it harder to compensate for the initial low prices in the future. 

Examples of Penetration Pricing Strategies

The perfect example of penetration pricing done right is Netflix. 

For every new subscriber, Netflix initially provided a one-month free subscription to try out all the content available on the platform. Once the user gets hooked to the platform, they are much more likely to pay for the coming months rather than miss out on the many series available. 

This strategy was also deployed by many other OTT platforms later to attract new customers.

Another great example could be the comparison between two smartphone companies like Apple and Samsung. Apple offers high prices while introducing its new products. Over the years, due to a significant increase in the brand loyalty of Apple, its customers believe that its products are of high quality with better features and thus are willing to pay for them. 

On the other hand, Samsung offers comparatively much lower prices for its Android phones. It also partners with cell phone companies and offers attractive discounts on its products in exchange for long-term commitments, hoping to build strong brand loyalty. Customers are usually enticed by these low prices which is why, while Apple sells expensive products to a smaller section of the market, Samsung sells cheaper phones to a much broader consumer base.

FAQs

Q: What is the market penetration strategy?

A: Market penetration strategy is a strategy employed by businesses to gain a greater share of the market than it currently has. This could be done through multiple paths such as better pricing, distribution, or research.

Q: What is the difference between market penetration strategy and penetration pricing strategy?

A: A market penetration strategy is employed by a business to increase its consumer base in the market, expand to new locations or improve its products. A penetration pricing strategy may be a part of this market penetration strategy to attract new customers by offering them lower prices or discounts.

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