Penetration pricing

Definition

Penetration pricing is a marketing strategy where a product is introduced at a low price to attract customers and gain market share quickly. This approach often leads to increased sales volume and can create brand loyalty as consumers become accustomed to the product. By setting a low initial price, businesses aim to entice customers away from competitors and establish a foothold in the market, which ties into how products progress through their lifecycle, strategic pricing objectives, psychological perceptions of pricing, and overall marketing mix strategies.

5 Must Know Facts For Your Next Test

1. Penetration pricing is especially effective for new products entering a competitive market where consumers have existing brand loyalties.
2. This strategy can lead to economies of scale, as higher sales volumes can reduce the per-unit cost of production over time.
3. Companies using penetration pricing must be prepared for potential losses in the short term as they establish their market presence.
4. Once market share is gained, businesses may gradually increase prices without losing customer loyalty that was built during the penetration phase.
5. Penetration pricing can also create barriers for competitors, as they may struggle to match low prices while maintaining profitability.

Review Questions

• How does penetration pricing align with the goals of increasing market share and brand loyalty?
  • Penetration pricing directly aims to increase market share by attracting customers with lower initial prices. This strategy makes it easier for consumers to try a new product or brand, fostering initial purchase behavior. As consumers become accustomed to the product at its low price, they may develop brand loyalty, making it more likely they will continue purchasing even if prices rise later.
• Discuss the potential risks associated with using penetration pricing in a highly competitive market environment.
  • In a highly competitive market, penetration pricing carries risks such as significant short-term losses and potential damage to perceived brand value. If the low price signals low quality to consumers, it could deter them from purchasing. Additionally, established competitors may respond aggressively with their pricing strategies, leading to price wars that further erode profit margins for all involved.
• Evaluate how penetration pricing influences psychological pricing tactics and consumer behavior over time.
  • Penetration pricing influences psychological pricing by creating a perception of value and affordability in the minds of consumers. Initially, the low price attracts cost-conscious buyers who might be wary of trying new products. Over time, as these consumers become loyal due to positive experiences with the product, companies can leverage this loyalty to introduce price increases. This shift encourages consumers to associate quality with the brand despite higher prices, ultimately enhancing their willingness to pay more based on prior satisfaction.

Related terms

market share:

The percentage of an industry's sales that a particular company controls, often a key goal of penetration pricing.

price elasticity:

A measure of how much demand for a product changes in response to price changes, which can impact the effectiveness of penetration pricing.

loss leader pricing:

A strategy where a product is sold at a loss to attract customers, similar in intent to penetration pricing but often used for different product types.