Marketing
Penetration Pricing
Penetration pricing is a marketing strategy where a product is initially offered at a low price to gain a foothold in the market. The goal is to attract customers and capture market share quickly. Once the product has gained traction, the price may be gradually increased. This approach is often used to compete with established brands or to introduce a new product.
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10 Key excerpts on "Penetration Pricing"
eBook - PDF- Louis E. Boone, David L. Kurtz, Michael H. Khan, Brahm Canzer, Rosalie Harms, Peter Moreira(Authors)
- 2023(Publication Date)
- Wiley(Publisher)
It can also help a firm recover its product development costs before competitors enter the field. This strategy is often used with prescription drugs. Penetration Pricing A Penetration Pricing strategy sets a low price as a major marketing tactic. Businesses may price new products much lower than competing products when they enter new industries that have dozens of competing brands. Once the new product achieves some market success, through purchases encouraged by its low price, marketers may increase the price to the level of competing products. But stiff competition can prevent the price increase. Another type of pricing strategy, loss leader pricing, is an aggressive pricing strategy in which a store sells selected goods below cost with hopes of attracting customers skimming pricing a strategy that sets an intentionally high price relative to the prices of competing products. Penetration Pricing a strategy that sets a low price as a major marketing tactic. 14.6 Pricing Strategies 423 who will make up for the losses on those products with additional purchases of more profit- able goods. Everyday Low Pricing and Discount Pricing Everyday low pricing (EDLP) is a strategy of maintaining continuous low prices instead of using short‐term price‐cutting tactics such as cents‐off coupons, rebates, and special sales. This strategy has been used suc- cessfully by retailers such as Walmart (see Figure 14.13) and GNC to consistently offer low prices to consumers; manufacturers also use EDLP to set stable prices for retailers. Businesses that use discount pricing hope to attract customers by dropping prices for a set period of time. Automakers usually offer consumers special discounts on most or all of their vehicles during the holiday shopping season. After the holidays, prices usually rise again. Experts warn that discounting must be done carefully, or profits can disappear.
eBook - PDF- Richard M. Hodgetts, Donald F. Kuratko, Margaret Burlingame, Don Gulbrandsen(Authors)
- 2015(Publication Date)
- Wiley(Publisher)
10.5 PRICING STRATEGIES 297 to stay with their current dentist rather than go to a large dental facility located in a shopping center, despite the fact their current dentist often charges higher prices. 10.5.2 Penetration Pricing Penetration Pricing is the strategy of employing a low price that is competitive and designed both to stimulate demand and to discourage competition. Pene- tration pricing most typically is used for low-priced goods where the firm’s objec- tive is to trade profit per unit for gross sales. For example, at a high price—say $2.99—a business sells 100 units per month of an item. But at $2.49 they sell 500 units per month. If the unit cost is $2, the business will make a total profit of $99 at the high price and $245 at the lower price. Another benefit of Penetration Pricing is that it discourages new competitors because the profit per item is low, and these firms often are unwilling to com- pete vigorously for the necessary market share. This is in contrast to a skimming strategy, which often attracts competitors who see the opportunity for large profit per unit. Penetration Pricing also helps a small business build an image as a place where merchandise can be purchased at reasonable prices. Many small businesses use Penetration Pricing because they are better able to control their costs than are larger competitors. Thus they can afford to take a lower profit per unit and still remain viable; however, Penetration Pricing must be closely coordinated with inventory ordering to ensure that the business nei- ther runs out of merchandise nor overstocks. FOR EXAMPLE Low Prices Can Send the Wrong Message A talented graphic designer started her own web-site design and manage- ment business, but was stumped by what to charge. There was a lot of com- petition, offering services at a variety of prices. Initially, she considered try- ing a low-price (penetration) strategy to generate some business.
eBook - PDF- Daniel Padgett, Andrew Loos(Authors)
- 2023(Publication Date)
- Wiley(Publisher)
2. The company must be certain that there will be an extended period after it introduces the new product without competition. 3. The company must be able to appropriately assess price thresholds to avoid decreasing the price too quickly or too steeply. If any of these conditions are not met, then a more effective pricing strategy would be a Penetration Pricing strategy. Penetration Pricing is defined as introducing a new product at a relatively low price with the intention of establishing a large market share before com- petitors can establish themselves. A good example of Penetration Pricing is Netflix. Netflix launched in 1998 and was a DVD only subscription that had a $5.99 price per month. This price encouraged a large number of new customers who stayed with Netflix. The low price for content also encouraged new customers so the company grew from 300,000 users in 2000 to 600,000 users in 2002, and up to 4.2 million users in 2005. Now Netflix has over 230 million customers worldwide! For Penetration Pricing to work: 1. The product should appeal to the mass market rather than just a niche or small market. 2. The company must have a cost structure to support the lower initial price. 3. The company should be dedicated and prepared to improve the product to maintain mar- ket share. It is often helpful to provide a comparative example to distinguish these two options. Let’s assume your company has developed a new process for analyzing DNA that could be used to test pets for potential problems before they develop. Your company has developed a handheld device that customers could use at home to test their pets. Your website allows them to upload their results and provides veterinarian-prescribed preventive treatment based on the results.
eBook - PDFApplied Marketing
Connecting Classrooms to Careers
- Daniel Padgett, Andrew Loos(Authors)
- 2019(Publication Date)
- Wiley(Publisher)
A penetration strategy means an initially low price is set so the company can establish market share before competitors enter. It is appropriate when competition is imminent, the company has a sufficiently low cost structure to support a lower price, and the product appeals to a mass market rather than a smaller segment or a niche market. • Pricing for new products requires the company to decide whether to use a cost-based pricing approach (using internal costs as a basis for setting price) or a value-based approach (using what customers are willing to pay as a base for setting prices). The company will also need to decide if prices will be static (stable) or dynamic (vary with market conditions). 10.4 Price Calculations To effectively set prices that make financial sense for the company, a manager needs to understand several basic calculations related to price. 10.5 Price Setting • There are six steps to setting a base price and then companies make adjustments to include discounts to arrive at a final price. • Steps to setting a base price include: (1) Set pricing objectives; (2) Estimate demand and revenue; (3) Determine cost, volume, and profit relationship for different price points: (4) Analyze com- petitors’ prices, offers, and value propositions; (5) Set initial base price; and (6) Adjust to set final price. • Once a base price is set, the manager will often make adjustments to the base price to set a final price. Some of the more common adjustments include quantity discounts, timing discounts, rebates, and price bundles. 10.6 Legal Issues Related to Price Decisions • There are two categories of legal issues related to pricing: illegal pricing practices that impact competitors and illegal pricing prac- tices that impact customers directly. • Initial laws regulating pricing issues were originally intended to protect smaller companies from larger competitors.
eBook - PDFInformation Markets
A Strategic Guideline for the I-Commerce
- Frank Linde, Wolfgang G. Stock(Authors)
- 2011(Publication Date)
- De Gruyter Saur(Publisher)
Penetration Strategy. Source: Simon & Fassnacht, 2009, 329. The latter variant, setting market entry prices, is particularly significant for infor-mation goods. The two variants for setting prices previous to market entry, long known, are the skimming strategy and the penetration strategy (Dean, 1951; Dil-ler, 2008, 289). In skimming, the provider initially sets high prices and then gradually lowers them in order to slowly address new layers of customers. In the penetration strategy, low entry prices are set, with the goal of raising them later, after the market has been covered accordingly and a strong market position is achieved. A comparison of both strategies can be found in Simon and Fassnacht (Figure 18.13). A central difference of both strategies is in the profit expectations, which are initially high and then low in skimming, and are vice versa by the penetration strategy. Skimming represents the traditional pricing strategy for introducing innovative products, in which companies try to operate as cost-effectively as possible from the outset by using high prices to address the customers with a high willingness to pay (Lee, 2003, 248). For digital information goods, however, the penetration strategy is more com-mon (Reibnitz, 2003, 13). It is often found as a special form called “Follow-the-free” (Zerdick et al., 2001, 191), or Dynamic Pricing (Wendt et al., 2000, 2), in Pricing 409 which products are sold for an extremely low price or even for free. Prominent ex-amples are Avira’s antivirus programs, Netscape’s and Microsoft’s browsers or Acrobat Reader. Figure 18.14: Profit Expectations of Skimming and Penetration Strategy. Source: Simon & Fassnacht, 2009, 330. This strategy, seemingly irrational at first glance, has a solid economical back-ground: Follow-the-free is the consequent implementation of the strategy, sug-gested as early as the mid-nineteen-seventies by Henderson (1974), of the very low starting price.
eBook - PDFPrinciples of Marketing
A Value-Based Approach
- Ayantunji Gbadamosi, Ian Bathgate, Sonny Nwankwo(Authors)
- 2013(Publication Date)
- Bloomsbury Academic(Publisher)
A variation of Penetration Pricing is rapid Penetration Pricing strategy , which involves launching a new product with a low price and supporting the product with high levels of promotional expenditure in order to gain an initial share of the market. This is organized on a large scale in the washing and liquid soap markets. Conditions for charging lower prices include: ● Lack of differential advantage ● Market presence or dominance ● Economies of scale ● Objective of making money later ● Strategic use of a loss leader to attract customers ● Attempting to create a barrier to entry Trial pricing involves pricing a new product low for a limited period of time in order to reduce the risk to customers. The idea is to win customers’ acceptance first Pric Think and discuss Airlines offer price discrimination in some circumstances; how do you think they justify this strategy? Is this approach sustainable, during unfavourable economic situations? ohohe 225 7 and make profits later. Trial pricing also works for services. Health clubs and other service providers may offer trial membership or special introductory prices. The hope is that the customer tries the service at a low price and is converted to using the service at the regular price. Conclusion This chapter began by discussing the meaning of price to marketers and consumers. It then focused on discussing the influences on pricing decisions by providing an understanding of how controllable and uncontrollable forces influence pricing deci-sions. It went on to show how pricing decisions work with other components of the marketing mix to create something of value to the customer. Overall, the chapter has provided a foundation for understanding the objectives of price and the policies guiding decisions and price-setting processes. P rimark is one of the widely known fashion retailers that have had significant impacts on British society in recent times.
eBook - ePub- Geoffrey Lancaster, Lester Massingham(Authors)
- 2017(Publication Date)
- Routledge(Publisher)
Price skimming is where the setting of a high initial price can be interpreted as an assumption by management that eventually competition will enter the market and erode profit margins. The company sets a high price so as to ‘milk’ the market and achieve maximum profits available in the shortest period of time. This ‘market skimming’ strategy involves the company estimating the highest price the customer is willing or able to pay, which will involve assessing the benefits of the product to the potential customer. This strategy has been successfully carried out by firms marketing innovative products that have substantial consumer benefits. An example of price skimming was Apple’s iPod. Launched in 2005, the initial price was set at £450. It now is possible to purchase variants of the iPod for less than £100.After the initial introduction stage of the product the company will lower the price of the product in successive stage so as to draw in the more price-conscious customers. When a company adopts this strategy the following variables are usually present:• demand for the product is high;• the high price will not attract early competition;• the high price gives the impression to the buyer of purchasing a high-quality product from a superior firm.Price penetration is the setting of a low price or the following of a ‘market penetration strategy’ by companies whose prime objective is to capture a large market share in the quickest time period possible. Conditions that prevail in such circumstances include:• price sensitive demand for the product;• a low price that will discourage competitors from entering the market;• potential economies of scale and/or significant experience curve effects; manufacture has to be large-scale from the outset;• a manufacturer prepared to wait longer to recoup capital investment costs.Pricing in the growth stage:
eBook - PDF- William Pride, O. C. Ferrell(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. PART 8: Pricing Decisions 608 Two strategies used in new-product pricing are price skimming and Penetration Pricing. With price skimming, the organization charges the highest price that buyers who most desire the product will pay. A penetration price is a low price designed to penetrate a market and gain a significant market share quickly. Product-line pricing establishes and adjusts the prices of multiple products within a product line. This strategy includes captive pricing, in which the marketer prices the basic product in a product line low and prices related items higher. Premium pricing is setting prices on higher-quality or more versatile products higher than those on other models in the product line. Bait pricing is when the marketer tries to attract customers by pricing an item in the product line low with the intention of selling a higher-priced item in the line. Price lining is when the organization sets a limited number of prices for selected groups or lines of merchandise. Psychological pricing attempts to influence customers’ perceptions of price to make a product’s price more attrac- tive. With reference pricing, marketers price a product at a moderate level and position it next to a more expensive model or brand. Bundle pricing is packaging together two or more complementary products and selling them at a single price. With multiple-unit pricing, two or more identical products are packaged together and sold at a single price. To reduce or eliminate use of frequent short-term price reductions, some organizations employ everyday low pricing (EDLP), setting a low price for products on a consistent basis.
eBook - PDF- Greg Elliott, Sharyn Rundle-Thiele, David Waller, Ingo Bentrott, Siobhan Hatton-Jones, Pete Jeans(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
Pricing new products Setting the initial price for the launch of a new product is a crucial aspect of product life cycle strategy (see the chapter on product). While prices can, and will, be adjusted after a product launch, the initial launch price can fundamentally influence the success of the entire marketing strategy. In settling the launch price, beyond considering the cost of manufacture and supply and the need to recover the investment in research and development, the marketer should consider consumers’ likely response to the new product, its perceived uniqueness and the likelihood, and timing, that competitors will follow into the market (i.e. the organisation needs to consider value, demand, costs and competition). Two broad pricing strategies for new products are ‘skimming’ and ‘penetration’ pricing. Penetration Pricing uses a low launch price in order to gain maximum sales volume, rapid market share and turnover of a new product. The low price also encourages consumers to at least trial the product. Penetration Pricing is commonly used in grocery product launches. The low-price, high-volume strategy may also serve to deter competitors from launching similar products. Price skimming involves charging the highest price that customers who most desire the product are willing to pay. Over time, the price is lowered to bring in larger numbers of buyers, again at the highest prices that these buyers are willing to pay. Price skimming allows an organisation to generate cash flow quickly to offset product development and launch costs. Price skimming also serves to temporarily limit demand, enabling the organisation to better balance demand with limited supply capacity. Initially, Tesla Pdf_Folio:245 CHAPTER 8 Price 245 had the market for electric cars largely to itself. This enabled it to charge high prices, free from the fear of immediate competition.
eBook - PDFProblems in Marketing
Applying Key Concepts and Techniques
- Luiz Moutinho, Charles S Chien(Authors)
- 2007(Publication Date)
- SAGE Publications Ltd(Publisher)
A firm must set a price for the first time when the firm develops or acquires a new product, when it introduces its regular product into a new distribution channel or geographical area, and when it enters bids on new contract work. The firm must decide where to position its product on quality and price. Companies usually do not set a single price but rather a pricing structure that reflects variations in geographical demand and cost, market-segment requirements, purchase timing, order levels, delivery frequency, guarantees, service contracts and other factors. As a result of discounts, allowances and promotional support, a company rarely realises the same profit from each unit of a product that it sells. Here we will examine several price-adaptation strategies: geographical pricing price discounts and allowances, promotional pricing, discriminatory pricing and product-mix pricing. After developing their pricing strategies, firms often face situations where they need to change prices. A price decrease might be brought about by excess plant capacity, declining market share, a desire to dominate the market through lower costs, or economic recession. A price increase might be brought about by cost inflation or over-demand. These situations may call for anticipatory pricing, delayed quotation pricing, escalator clauses, unbundling of goods and services, and reduction or elimination of discounts. There are also several alternatives to increasing price, including shrinking the amount of product instead of raising the price, substituting less expensive materials or ingredients, and reducing or removing product features. It is often difficult to predict how customers and competitors will react to a price change. (M) Problem 6.1 Determining price levels Introductory comments Whatever the pricing strategy and structure a company adopts, it ultimately has to arrive at price levels for specific items, target markets and periods.
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