The mention of penetration pricing strategy always manages to raise eyebrows. Admirable in some cases; cheeky and underhand, otherwise. The intent of penetration pricing is honorable, of course. It simply aims at boosting the market share of an established product or capturing customers in case of a new launch by underpricing it. Implementing this strategy is akin to playing with fire, as a few dubious qualities associated with it can create unnecessary problems for any company.
Advantages of Penetration Pricing
Does penetration pricing work? It definitely does, and it succeeds in taking your rivals completely by surprise, giving them no time to recover from your onslaught. If your sales pick up, thanks to word-of-mouth publicity, nothing else could be better.
1. Penetration price strategy is implemented with the sole intention of spreading your presence in the market. It is an appropriate marketing tool which creates a loyalty base for your product.
2. Deliberate underpricing is suitable for average quality products and new products under automobiles, computer accessories or cosmetics. It also works well for commodities with a shorter shelf life, such as consumable items. The distributors and retailers have reasons to cheer as penetration pricing effectively accelerates the turnover.
3. The low cost manages to generate an interest, especially among those looking to snag a bargain. After this, it is up to the product to impress the consumer. If it gets an approval from the consumer, the company can think of gradually increasing the cost and rake in actual profits.
4. It results in startling your competitors, more so if the product segment is overflowing with options for the consumer. If a rival product is looking to enter the market, your penetration pricing strategy will arrest it by grabbing a lion’s share in consumer preference. It puts your product in a vantage position to establish a firm hold in its arena.
5. There are also instances where companies have managed to pocket some profit despite using this strategy. The trick used here works on products that need add-ons to function. Cheap razors that need expensive cartridges or low cost printers, which function on outrageous refills illustrate this point.
6. When a product is placed in the market at an attractive “introductory price”, consumers expect a price rise in the near future, and sometimes decide to stock up on it, thus fulfilling the purpose of penetrative pricing. Mind you, this is only possible in cases of products launched by recognized brands.
Examples: Automobiles, computer accessories, food supplies, cosmetics, etc.
Disadvantages of Penetration Pricing
The catch here is that penetrative pricing works best with products that are in demand. Just think – would consumers care any less if a new, low-priced doorknob was launched in the market? Certainly not, thus rendering it incompatible with several products.
1. A company has to forgo all hopes about making any profit in the short term. The low entry price puts to rest all chances of earning revenues. Further, if the consumer parameters are not fulfilled, the company may have to kiss the product goodbye.
2. Having thrust your product into the market with an obscenely low price, expect several hurdles when you eventually decide to hike the cost. While a price increase is inevitable, doing so may result in the consumers turning their backs to your product.
3. Consumers looking for a cheap deal often fall prey to penetration pricing. You could be missing out on your target consumers, which is not a good sign for any product looking to establish itself in the market.
4. The price is not the only factor that a consumer has in mind while buying a new product. In fact, a whole breed of consumers equate premium quality with high prices. It would be inappropriate to implement this strategy on products in the niche segment.
5. This strategy can horribly backfire if your rivals decide to join the bandwagon and lower their product prices further, triggering a price war. This can have a disastrous end, with all offenders involved having to do some serious damage control.
6. Predatory pricing is a cruel variant of penetration pricing. This is when a company prices its product abysmally low, demolishes all traces of competition, and finally creates a monopoly. Reason enough for some countries to deem this practice illegal.
Examples: Luxury products, high-end automobiles and gadgets, limited-edition products, etc.
It is impossible to remove the crookedness out of penetration pricing. This strategy stands on the premise of elbowing out competition, straying on to unethical territories at times. However, there is no doubt about its success rate and its practicality, more so in the consumer packaged goods market.