![]() ![]() Companies can also get a significant part of the market before competitors react to their pricing strategy.As a result, any corporation should avoid using penetration pricing as a long-term pricing strategy. Customer contentment cannot be assured, and in some situations, customers may continue to be a financial drain.The rapid influx of new customers who see the product’s value and believe they are getting a good deal.There are various benefits to using penetration pricing, but some substantial potential negatives to consider. Pros And Cons Of Using A Penetration Pricing Strategy The aim is that the higher sales volume will compensate for the lower cost. ![]() Following a time of expansion, the company often raises prices to boost profits and reflect the increased value of the product. Customers of competitors may migrate to the cheaper offer, and new customers may join as well. The low initial price forces competitors to match the offer or quickly implement different techniques. It is the practice of setting a low initial price for a product to make up for it in the long run by upselling or cross-selling to newly gained customers.īusinesses use penetration pricing to introduce a low price for a new product or service. The penetration pricing strategy, often known as the “land and grow” method, is a pricing strategy used by businesses (especially in the SaaS industry) to penetrate or infiltrate new markets or rapidly expand in existing markets by charging higher prices. The low initial price can create an expectation of permanently low prices amongst customers who switch.Definition Of A Penetration Pricing Strategy Penetration pricing strategies do have some drawbacks, however: Sales volumes should be high, so distribution may be easier to obtain The low price can act as a barrier to entry to other potential competitors considering a similar strategy It forces the business to focus on minimising unit costs right from the start (productivity and efficiency are important) Encouraging word-of-mouth recommendation for the product because of the attractive pricing (making promotion more effective) Catching the competition off-guard / by surprise Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic – so a lower price than rival products is a competitive weapon.Īmongst the advantages claimed for penetration pricing include: However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified. In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. The strategy aims to encourage customers to switch to the new product because of the lower price. Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The aim of penetration pricing is usually to increase market share of a product, providing the opportunity to increase price once this objective has been achieved. You often see the tagline "special introductory offer" – the classic sign of penetration pricing. ![]()
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