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Pros and Cons of Penetration Pricing Strategies

written by: Vikas Vij•edited by: Jean Scheid•updated: 2/28/2011

Want to get a breakthrough for your brand in a new market or increase your market share for an existing product? Consider a penetration pricing strategy to gain the initial customer base, and word of mouth publicity will do the rest.

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    Aggressive Pricing to Increase Market Share

    Price War Penetration pricing strategy is one of the most effective marketing strategies available to a business organization. However, this strategy can be used only in specific situations when the business is in a strong position to sustain itself even with a penetration price. This strategy involves setting a low entry price for a new product or brand in order to gain a breakthrough in a highly competitive market. The strategy can also be used when introducing a completely novel product in the market or when tapping a new market segment for an existing product.

    A company employs penetration pricing with the expectation that eventually the price will be raised once the initial marketing objectives are fulfilled. Its aim is to attract the customers to try the company’s product. By keeping the price intentionally lower than established competitors, the business aims to compromise existing brand loyalties of the customers. The ultimate goal of this strategy is not to maximize profits, but to allow a new product or brand to gain a foothold in the marketplace.

    Photo Credit: mrceviz

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    Advantages of Penetration Pricing Strategy

    The core benefit of this strategy is that it manages to cut down the struggle time for a new brand, and gains early adopters for it fairly quickly. Thereafter, the early adopters can lead to more customers through word of mouth publicity. If the market is particularly large and diverse, this strategy makes it easy to achieve quick diffusion of the product across various market segments.

    Another benefit of this strategy is that it makes the organization more cost conscious from the beginning, and compels it to achieve higher cost efficiencies than the competitors. This aggressive pricing strategy takes the existing competitors by surprise and seizes advantage before they can react with counter strategies. At the same time, it dissuades the entry of new competitors by creating stiff pricing barriers.

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    Limitations of Penetration Pricing

    One of the common challenges posed by this strategy is that once the initial market euphoria settles down, it may become difficult for the company to sustain such low pricing for the long term. The hurdle usually is that the customers tend to associate the brand’s image with low price, and are unable to accept it if the price goes high. In many cases, the customers switch back their loyalties to older brands that did not compromise on their image as a quality and not price oriented player.

    This limitation should be carefully evaluated by a marketer before choosing this strategy to promote a new brand. Some marketing experts are of the opinion that a mid-way strategy should be adopted to overcome this limitation. The brand should maintain an initial price in line with the competitors’ prices, but offer an introductory discount coupon or scheme to encourage customers to try the new brand and form an opinion about it after usage.

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    When Is Low Entry Price Strategy Appropriate?

    Low entry pricing should be adopted only in a situation where the business organization is financially very strong and can survive on low profit margins for a prolonged period of time. Secondly, the basic demand for the product should be high so that economies of scale may be achieved in order to operate on a low price for a long time. Therefore, this strategy is usually preferred for products that command a mass market, and the mass consumers are highly price sensitive.

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    Industry Examples of Penetration Pricing

    Discount retailers such as Wal-Mart and many other multi-national corporations such as Procter and Gamble and Unilever employ this strategy to penetrate into new and unknown international markets. An innovative food brand may use this strategy at a local level when there is an expectation that customers may get hooked on it due to its unique taste and quality. Car manufacturers employ this strategy sometimes in untapped consumer segments of Asian and African markets in order to create a new desire in the segment to own a premium product.

    An interesting variant of this strategy is the “hook and bait" strategy that is applicable in specific durable product segments. For instance, Gillette is known to penetrate new markets by offering its razors at extremely low prices, and once the customer is hooked on to its quality, it makes money by selling blades at high prices. Similarly, computer printer manufacturers such as Hewlett-Packard sell their printers at very low prices to enter the market, and then make money by selling ink cartridges at high prices.

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