Penetration pricing strategy is a strategy that takes advantage of the low price of a product or service to grow market share and to encourage consumers to try a new product. In this case, the company sets a lower retail price than its competitors for a product with similar features.
One advantage is that you can gain more customers quickly because they are attracted by an attractive offer.
On the other hand, market penetration may encourage existing competitors to decrease their prices in order not to lose potential customers.
However, it is important to note that penetration pricing does not necessarily mean loss-making for companies as long as they can sustain drop in selling prices over time with maximum efficiency. Penetration pricing makes sense when there is elasticity, especially when there are cost savings during mass production.
Time differentiation in selling prices means that the same product has different selling prices at different times.
For this case, companies can charge higher prices when demand is high and lower when demand is low. This strategy will be effective when we assume that consumers’ willingness to pay changes over time or consumers have limited budget for a given product and therefore they would only purchase it at a favored price point during any given day/week/month etc. Examples of such products include airline tickets, movie theater tickets, hotel rooms etc.. These are considered luxury goods because people are willing to wait until sales occur before buying or they are willing to purchase them at a less than preferred price.
Advantages of penetration pricing strategy are:
- High sales due to low price of flagship product
- Penetration pricing can lead to an increase in total consumer demand because consumers are more likely to purchase the product on sale than when sold at the original retail price
- Helps businesses capture market share by attracting new customers who wouldn’t have otherwise purchased the product without a preferred price point.
Disadvantages of penetration pricing strategies are:
- A decrease in long-term profits because it takes time for revenue to outweigh expenses that occurred while offering lower prices e.g shipping costs, loss leader discounts etc..
- Attracts competitors into bidding wars which will lead to all companies reducing their prices until there is little or no profit left for any of them .
- Tarnishes the brand name by setting the price too low which is why some companies prefer not to use it unless it fits their strategy.
One of the most well known examples is Walmart’s everyday low pricing model, whereas recommended retail prices are for items to be sold at approximately 1/3 above wholesale cost. This allows Walmart to capture customers by offering lower prices than its competitors (and still turn a profit), while allowing them to sell merchandise at less than what they paid for it (thereby capturing new customers).
Another example is Best Buy who uses an every-day-low-price system with free shipping on all products; this helps them capture market share and dominate online sales via shipping discounts (although shipping costs are not a profit center).
Armin Ronacher, creator of Flask and director of Python Productivity Portfolio at The Pythian Group claims that he is tired of this practice:
In the software industry we have been brainwashed by companies like Amazon and Walmart. We should stop using their pricing model for our own company. I don’t want to compete on price. There are enough other ways to add value. And if you can’t find them, drop your prices or fire your sales team because you are incompetent.
I was appalled when I heard about Kickstarter. “Give me money so I can build something without knowing if there’s any demand for it” is simply ridiculous to me…
My most recent experience with this approach was with a prospective client: “We want to pay you the minimum possible amount and then we will see how it goes”. I said bye. Bye, bye!
I would never be able to advise anybody in such a way. It’s your responsibility as a consultant to find ways how both of us can make money from this project. Otherwise don’t take on such projects at all. You shouldn’t expect air traffic controller salaries for driving trucks through the countryside, right?
The Pythian Group is not alone with its views – here is what Timo Elliott , founder and CEO of Solid IT GmbH, has to say:
For example, customers that do their annual budgeting based on maximum x percent price increase (see also my blog post about this). Or customers that want to negotiate the final price (see blog entry ” The Price is Right ” ). Or customers that want to build their own tools around your products (to be able to sell it next year at double the price) instead of using something off-the-shelf. These are not consulting projects; these are support contracts masqueraded as consulting projects, and they are becoming more popular by the day.
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