This, nonetheless, may be compensated by higher volume of sales. Also, this way you can increase product sales, distribution channels, gain extra space on the market and overall profitability. If a company is having a sale on selected goods, it can alter the ending digits of product prices to identify them as being on sale. Selecting the appropriate pricing strategy when launching a new product is critical to both short-term and long-term business and financial success. Where are we trying to get with this? However, the seller is not irrational. It becomes more complex when competing with large firms. Sometimes, products are expensive to create and small businesses tend to struggle while trying to produce enough to lower the production and product price.
A common solution to this problem is to set the initial price at the long term market price, but include an initial discount coupon. Furthermore, market penetration is frequently used a measure to determine, whether your product or a service is capable of capturing a fixed percentage of the market. Limited Timeframe Even if market penetration pricing does work as intended, businesses should be aware that the strategy will only be effective for a limited period of time. Price skimming is a pricing strategy which companies adopt when they launch a new product, in this strategy while launching a product company sets high price for a product initially and then reduce the price as time passes by so as to recover cost of a product quickly. Lowering Industry Prices — Market penetration strategy can harm the entire organization.
To succeed with penetration pricing, you need a cost structure that is low, or that improves with economies of scale as you sell more products. Under this strategy company initially sets low price for its product or service and then gradually increase the price once the product or service has developed good customer base. Increased Promotion — Investing more time and strength in a promotion can dramatically increase market penetration. Improved Profits The most obvious one. You can also achieve market penetration through aggressive marketing campaigns and distribution strategies.
It can also be used as an aggressive tactic against competitors, which will have to lower their prices in response or risk being forced out of the industry. Psychological pricing is the practice of setting prices slightly lower than rounded numbers, in the belief that customers do not round up these prices, and so will treat them as lower prices than they really are. Market penetration pricing refers to a strategy in which the price of a product is set low following its introduction in the market. Market penetration can be measured as the percentage of the market you are able to capture. .
If the product has a short life cycle and goes out of date within a short period, the loss suffered by the marketer will be huge. This is common in technological markets where repeat purchase is uncommon. Along with generating more sales from existing customers, market penetration pricing lets businesses find new buyers that may not be willing to pay higher prices for similar goods. Our tutors are highly qualified and hold advanced degrees. Increase Usage — Market penetration can be increased through product consumption. Best Businesses for Market Penetration Pricing While market penetration pricing can be an effective strategy, not all businesses or products are equally suited for it. Make a list of such customers and let the employees know to approach them a bit differently.
As a result, they may be free to purchase goods from suppliers in greater volumes at discounted rates. When sales to that group slow or competitors emerge, the company progressively lowers its price, skimming each layer of the market until the low price wins over even frugal buyers. Online Solution Advantages, Disadvantages of Penetration Pricing Help: If you are stuck with a Solution Advantages, Disadvantages of Penetration Pricing Homework problem and need help, we have excellent tutors who can provide you with Homework Help. It does not matter if you corner the market for your goods and services, if your business cannot survive long enough to meet this need. Do you know what these companies do? The aim of market penetration is to effectively use your product, enter the market as quick as possible and seize a large market share. It is relatively common for a new entrant into a market to engage in penetration pricing, in order to grab an initial block of market share.
It shows you may be missing your target customers and it is certainly not good for any new entrant looking to establish its market and win market share. It is one of the four factors in the marketing mix, along with product, distribution and promotion. In most countries, predatory pricing is illegal, although it can be difficult to differentiate illegal predatory pricing from legal penetration pricing. Price your goods at the highest the market will bear; when that is too high, then you simply cannot sell that good. It is very common in technological markets mobile phones, gaming consoles such as Sony Playstation and Microsoft X-box, etc.
Advantages of Market Penetration Strategy Fast Growth — If your business and is to enlarge your consumer base, then market penetration is the most effective way to act. This happens because now the competitors will have to enter the market at lower than existing prices. This can create more trade through word of mouth. Consequently, fast growth is heavily linked with low prices, and the more reasonable they are, the higher the impact will be. While the demand is increasing, the organization saves money on product creation costs due to the greater volume of production. He has been a college marketing professor since 2004. Also, this way you can increase product sales, distribution channels, gain extra space on the market and overall profitability.
Competitors may respond with even lower prices, so that the company does not gain any market share. Definition of Penetration Pricing Penetration pricing is the practice of initially setting a low price for one's goods or services, with the intent of increasing market share. About the Author Ellis Davidson has been a self-employed Internet and technology consultant, entrepreneur and author since 1993. Rate of diffusion or adoption is the speed at which it is accepted. Both steps are expensive, so penetration-pricing strategies might not work well for small businesses.