Pros And Cons Of Penetration Pricing Strategy

Pros And Cons Of Penetration Pricing Strategy

Some businesses entering emerging and existing markets have no way to compete but to offer products priced below what their competitors are offering. This is called a penetration pricing strategy and it intends to catch the attention of the target consumers and generate sales.

Of course, a competitive edge is one of the discernible advantages of a penetration pricing strategy. However, it has some notable disadvantages, as well as precautions. This pricing strategy might be effective for some but can also be detrimental to others.

Pros: Advantages of Penetration Pricing Strategy

Remember that the goal of this pricing strategy is to not only enter a market but also penetrate it by getting a considerable portion of the entire market share. Hence, more than just a simple revenue strategy, it is also a marketing strategy and an integral element of the marketing mix of a particular business organization.

Below are the specific applications and benefits:

• May Help in Faster Product Adoption: One of the main advantages of penetration pricing strategy, including one of its applications, is for a new business or new market entrant to make its product more attractive to the target consumers. A lower price tag is appealing in situations in which price demand is highly price elastic or in a saturated market characterized by intense industry rivalry.

• Can Serve as a Barrier to Entry: Of course, aside from penetrating the market, an established firm can set the price of its product considerably low to discourage others from entering the market, thereby raising the barrier to entry. New entrants are left with no choice but to either offer competing products at the same price points or come up with an attractive unique value proposition that justifies their higher prices.

• Supplements Economies of Scale: Another advantage of penetration pricing is that it complements or supplements the cost advantages of an organization, specifically if it has achieved substantial economies of scale. This business can set the price of its products low because it has achieved cost leadership in the market by scaling its operations in a manner that lowers its costs.

• Appropriate for Mass Market Products: This pricing strategy is also applicable to products intended to mass markets or those with enough demand. Mass markets are characterized by fast-moving goods and household items such as processed food and toiletries or personal care products. Consumers in these markets are more willing to try newer and less inexpensive product alternatives.

• Bait and Hook Product Strategy: A company can also utilize penetration pricing for a particular product category that follows a bait and hook or razor and blades business model. To illustrate, razors are considerably inexpensive. Companies that sell them do not make a profit from these products alone. Their main revenue-generating products are the interchangeable blade. The same model is rampant in the printer industry.

One of the notable examples of a business that has utilized a penetration pricing strategy to enter an established market and promote its brand is Xiaomi Corporation. The Chinese company entered the smartphone market in 2010 amidst the intense rivalries between established competitors such as Apple and Samsung.

To set itself apart from the rest of the competition, it developed and marketed smartphones that are 25 to 50 percent more affordable. Xiaomi is now one of the Fortune Global 500 companies and it has built a reputation for introducing a range of smartphones for different pricing brackets. Note that it now has flagship products priced at the upper end of the pricing spectrum.

IKEA is another example of a company that succeeded in using this pricing strategy. Part of the business strategy and marketing mix of this Swedish furniture maker is to produce ready-to-assemble furniture at lower costs and sell them at prices lower than traditional furniture makers. The same strategy has been utilized by fast-fashion companies such as Zara and H&M.

Cons: Disadvantages of Penetration Pricing Strategy

As mentioned earlier, despite the advantages, the known drawbacks or disadvantages of penetration pricing make it a tricky pricing strategy and a delicate component of the overall business strategy of an organization. Setting prices of products too low can backfire and affect not only the current revenues of a business but also its long-term outlook.

Below are the specific drawbacks and limitations:

• Can Result in Substantial Losses: One of the disadvantages of penetration pricing is the lack of guarantees. It is not a surefire market entry solution or a fail-safe approach for managing threats from new entrants. Sales of a low-priced product might not be enough to cover the costs incurred from production and overall operations if sales volume is not enough to achieve a break-even point.

• Needs Effective and Comprehensive Marketing: The marketing strategy of a business should not rest alone on this pricing strategy. A firm must develop and implement an effective and comprehensive marketing strategy that takes into consideration relevant marketing messages and specific distribution and promotional strategies. There are instances when a low price is not enough to push a product to the market.

• Predatory Pricing and Monopoly: An extreme and often illegal form of penetration pricing is predatory pricing. This involves a business setting an unsustainable low price for its product intended to eliminate its competitors or seasoned players in a market and establish a monopoly. This practice is illegal in several countries. However, it can be difficult to differentiate between penetration and predatory pricing.

• Can Paint a Negative Brand Impression: Products with cheaper price tags can be perceived as inferior when compared with their counterpart products with premium price tags. This is true for new entrants or unestablished brands. There are certain markets and market segments populated by sizable numbers of consumers who are willing to spend more for the perceived quality and symbolism of pricier products.

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