A market penetration pricing strategy means setting the price of a product or service as low as possible to facilitate rapid sales. It is likeliest to succeed in large, growing markets and is most often used in new product introductions. A penetration price is generally chosen when the marketer's goal is to achieve high market share.
Market Penetration Pricing
Penetration pricing is a type of marketing strategy where businesses try to attract customers to try a new product or service. The idea is to present a low price for a new product or service during an initial offering in order to lure customers away from competitors or intrigue them to try something they never considered before. In most cases, companies will increase the price once the product or service becomes popular with its target customer.
Penetration Pricing Advantages
In many markets, consumer demand is elastic; in other words, people will buy more of a product the lower it is priced. A market-penetration pricing strategy is most suitable when it creates a significant advantage for a firm that can identify and act on this type of price sensitivity. Penetration pricing often has the effect of blocking, or at least delaying, competition. In addition, it can help to lower per-unit costs of production when manufacturing processes are subject to economies of scale.
Penetration Pricing Risks
If sales volume fails to build as fast as projected in response to penetration pricing, a firm may have trouble recovering its research and development costs. Its overall profitability will suffer if it has produced far more than it can sell. Additionally, penetration pricing can hurt a brand's value image by suggesting to consumers that it is the cheapest – not necessarily the best. This can unintentionally create a perceptual opportunity for competitors with higher-priced goods.
Examples of Penetration Pricing
Some of the most successful practitioners of penetration pricing strategy are retail discount operations, including warehouse, club and outlet stores. These types of businesses compete much more heavily on price than on quality or other benefits and do especially well in a weak economy. In the general merchandise category, Walmart is a leader in penetration pricing. In the grocery sector, the Aldi chain has pioneered this approach. Other examples can be found in categories like consumer electronics, furniture and toys.
Alternatives to Penetration Pricing
Price skimming is the clearest alternative to price penetration. It is an attempt to create a perception of exclusivity and value by charging the most expensive price the market will bear. Many high-technology products, like smart phones and high-definition televisions, have been introduced at a skimming price that is steadily reduced as the item's novelty wears off. Another alternative is status quo pricing. Users of this strategy choose a price that is identical or closely comparable to competition. While not an aggressive approach, status quo pricing offers the benefit of low risk.
Amy Handlin has been writing about government, business and politics since 1999. She is the author of "Be Your Own Lobbyist" and "Government Grief: How to Help Your Small Business Survive Mindless Regulation, Political Corruption and Red Tape." She is also a state legislator and associate professor. Handlin graduated from Harvard and holds advanced degrees in marketing from Columbia and New York University.