Setting an initially low price to attract customers and quickly gain market share Show
What is Penetration Pricing?Penetration pricing is a pricing strategy that is used to quickly gain market share by setting an initially low price to entice customers to purchase. This pricing strategy is generally used by new entrants into a market. An extreme form of penetration pricing is called predatory pricing. Rationale Behind Penetration PricingIt is common for a new entrant to use a penetration pricing strategy to quickly obtain a substantial amount of market share. Price is one of the easiest ways to differentiate new entrants from existing market players. The overarching goal of this pricing strategy is to:
Situations where penetration pricing works effectively:
Illustration and Example of Penetration PricingA current small-sized player in the marketplace where laundry detergent sells at around $15. Company A is an international company with a large amount of excess production capacity and is, therefore, able to produce laundry detergents at a significantly lower cost. Company A decides to enter the market, employ a penetration pricing strategy, and sell laundry detergent at a sale price of $6.05. The company’s cost to produce laundry detergent is $6. With a marginal cost of $6 and a sale price of $6.05, Company A is making nominal profits per sale. However, the company is comfortable with this decision as its overarching goal is to switch customers over, capture as much market share as possible, and utilize economies of scale with their high production capacity. Company A believes that its competitor will not be able to sustain itself in the long-term and will eventually exit the market. When the competitor exits the marketplace, Company A will become the only seller of laundry detergent and therefore be able to establish a monopoly over the market and raise prices to a level that will provide a high profit margin. Advantages of Penetration Pricing
Disadvantages of Penetration Pricing
Related ReadingsThank you for reading CFI’s guide to Penetration Pricing. To keep learning and advancing your career, the additional CFI resources below will be useful:
In which of the following pricing approach is pricing based on consumer demand?Key Takeaways
Value-based pricing is a strategy of setting prices primarily based on a consumer's perceived value of the product or service in question.
What do you mean by demand based pricing strategy?What is demand-based pricing? Demand-based pricing any pricing method that considers fluctuations in customer demand and adjusts prices to fit the changes in perceived value that come with them.
Is a pricing method based on the customers demand and the perceived value of the product Mcq?Pricing decisions MCQ Question 4 Detailed Solution
The correct answer is- By-product pricing.
What are the four pricing strategies?What are the 4 major pricing strategies? Value-based, competition-based, cost-plus, and dynamic pricing are all models that are used frequently, depending on the industry and business model in question.
What is the name of the pricing strategy?Competitive pricing
The competitive pricing strategy sets the price of your products or services at the current market rate.
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