Penetration pricing strategy is a pricing strategy where the price of a product is kept low to attract customers and gain market share. The penetration pricing strategy, also known as discounting, typically involves offering a significant reduction in price for a short time only. Once the business reaches its desired customer base, it can raise prices making it more difficult for potential new customers to switch suppliers.
The disadvantages of using penetration pricing are that you may lose money initially due to selling at such a cheap rate and this may lead to issues attracting new customers once your prices increase; soon after they would have become accustomed to your inexpensive goods and services. Alternatively if you sell too cheaply and alienate other potential buyers then they might never purchase from you again even when you do raise your prices.
You should also consider how the competitor’s will react to your plans. If they decrease their own prices you might be forced to follow suit, and if they increase theirs you might not be able to maintain yours and so damage your relationship with customers who may think you are now too expensive. You need to develop a strategy of maintaining different prices for different customers – this is called differential pricing .
Advantages of penetration pricing strategy are:
- It enables new companies to enter industry without much difficulty. They can easily reduce the prices rather than trying to earn profits in a competitive market by using alternate price strategies.
- It enables them to capture a large portion of market share and increase brand awareness quickly.
- Penetration pricing is beneficial for producing high quality products for customers; instead of keeping low price on low quality products, offering costly but good-quality products can help companies to maintain their image within society, thus gaining customer loyalty with future higher sales margin per unit..
- The strategy provides suitable time for the manufacturer’s research & development department to produce next generation products which are more technologically advanced than existing ones at same or lower cost so that they can retain their competitive edge over rival companies.
- Penetration pricing is advantageous for small business enterprises which do not have enough resources to take advantage of economies of scale .
- When a company adopts this method, it does not have to commit itself to offering the same product at low prices forever; when demand increases, the company can raise price gradually in order to take full advantage of its market share without losing customer loyalty due to sudden change in price .
- Penetration pricing is also beneficial for avoiding false economies that one incurs by cutting back on advertising or research & development expenses in an attempt to reduce costs below what are necessary in the long term .
Disadvantages of penetration pricing strategy are:
- When prices are set too low initially, the public might consider the product as inferior because of the low price .
- Low prices may attract competitors who can reduce their costs by not incurring initial research & development expenses or advertising costs .
- Competition may force you to lower prices even further in order to make a profit which will not allow for enough revenue needed for continued growth and improvement of the company .
- After seeing your product advertised at such low prices, customers may expect the sales rep to offer them similar bargains on all products .
- Penetration pricing allows other competing companies to also offer competitive pricing thus reducing your overall market share and profitability over time .
- Company can lose future business if it raises prices again after giving the initial low prices .
- If customers are not satisfied with their purchase, you have offered a high quality product at such an unbeatable price, they may feel like they do not need to shop around for your competitors (risk of customer loyalty) .
Disadvantages of high low pricing strategy are:
1) The customer has no opportunity to negotiate lower prices, which leaves them with an unfair perception about your product .
2) This strategy can cause low profits for the entire industry because only people who are extremely price conscious will buy your products .
3) Customers can feel cheated if they learn that similar or identical products are being sold at different prices by other companies in the same industry.
4) competitors do not have penetration pricing disadvantages.
5) It can also reduce business’ future sales by spoiling the customer’s perception of your brand.
6) The disadvantages of a high low pricing strategy will not be good for profits.
7) This strategy can cause low profits for the entire industry because only people who are extremely price conscious will buy your products.
8) Customers can feel cheated if they learn that similar or identical products are being sold at different prices by other companies in the same industry.
9) The disadvantages of a high low pricing strategy will not be good for profits.
10) This strategy can cause low profits for the entire industry because only people who are extremely price conscious will buy your products.