Penetration pricing

Penetration pricing is a

Motivation

These are advantages of penetration pricing to the firm:[3]

• It can result in fast diffusion and adoption, which can achieve high market penetration rates quickly and take the competitors by surprise, not giving them time to react.
• It can create goodwill among the early adopters
  segment and can create more trade through word of mouth
  .
• It creates cost control and cost reduction pressures from the start, leading to greater efficiency.
• It discourages the entry of competitors. Low prices act as a barrier to entry (see
  Porter's 5-forces analysis
  ).
• It can create high stock turnover throughout the
  distribution channel
  , which can create critically important enthusiasm and support in the channel.
• It can be based on marginal cost pricing, which is economically efficient.

The main disadvantage with penetration pricing is that it establishes long-term price expectations for the

remain high even though the actual selling price is low.

Another potential disadvantage is that the low profit margins may not be sustainable long enough for the strategy to be effective.

Price penetration is most appropriate in these circumstances:

• Product demand is highly price elastic.
• Substantial economies of scale are available.
• The product is suitable for a mass market, with enough demand.
• The product will face stiff competition soon after introduction.
• There is not enough demand amongst consumers to make price skimming work.
• In industries in which standardization is important. The product that achieves high market penetration often becomes the industry standard (such as Microsoft Windows) and other products, whatever their merits, become marginalized. Standards carry heavy momentum.

A variant of the price penetration strategy is the bait and hook model (also called the

(often half-full), which themselves cost around $30 each to replace. Thus, the company makes more money from the cartridges than it does for the printer itself.

Taken to the extreme, penetration pricing is known as

, but it can be difficult to differentiate illegal predatory pricing from legal penetration pricing.

Let's take an example of penetration pricing strategies being put to work. A Friday night trip to a

]

Research

In an empirical study, Martin Spann, Marc Fischer and Gerard Tellis analyze the prevalence and choice of dynamic pricing strategies in a highly complex branded market, consisting of 663 products under 79 brand names of digital cameras. They find that, despite numerous recommendations in the literature for skimming or penetration pricing, market pricing dominates in practice. In particular, the authors find five patterns: skimming (40% frequency), penetration (20% frequency), and three variants of market-pricing patterns (60% frequency), where new products are launched at market prices. Skimming pricing launches the new product 16% above the market price and subsequently increases the price relative to the market price. Penetration pricing launches the new product 18% below the market price and subsequently lowers the price relative to the market price. Firms exhibit a mix of these pricing paths across their portfolios. The specific pricing paths correlate with market, firm, and brand characteristics such as competitive intensity, market pioneering, brand reputation, and experience effects.^[4]

• Pricing
• Marketing
• Microeconomics
• Outline of industrial organization
• Business model
• Price skimming
• Predatory pricing
• Sales promotion
• Product differentiation