Price Strategy: Rationale, Significance, Advantages, and Disadvantages
Pounding the Market: All About Penetration Pricing
Penetration pricing is a stealthy move in the pricing game, where a company intentionally charges a low price to swiftly conquer the market. This strategy primarily aims to secure as many customers as feasible and as rapidly as possible.
The eye-catching low price is the ultimate bait for many consumers. Some dig the deal simply because it fits snugly in their budget plan. Others might be intrigued by the product's promise, lavish satisfaction affordably.
As consumers grow fond of the product, their loyalty could spin them into a circle of repeated purchases or recommendations to friends and family.
The price maneuver is typically employed by firms stepping onto fresh flours. With no existing customer base, their primary goal is to lure in the first batch of consumers. One tactic includes slashing prices to an attractive minimum.
Once the product has claimed its spot in the market, price increases follow to compensate for earlier profit losses. The focus then shifts to non-price aspects of the product, such as quality, features, or support services, to avoid cutting-throat competition and price wars with rivals.
Take Dell, the laptop titan, for instance. In the early days, Dell sold high-quality machines at relatively reasonable prices. Satisfied consumers were expected to return for more, or perhaps recommend Dell products to friends or relatives. Costco and Kroger, heavyweights in the wholesale business, similarly adopt penetration pricing by lowering the price of organic food to stimulate sales. Even though the profit margin is slightly lower, they manage to profit almost immediately due to achieving economies of scale. Additionally, they have the flexibility to subsidize low margins with higher margins in other product lines.
Penetration pricing is a joyride for companies seeking new patrons. Lower prices attract novel consumers, effectively promoting the product itself. It's humbler compared to the differentiation strategy, where companies must painstakingly manufacture a product's uniqueness that might not resonate with consumer preferences, demanding hefty investments in influencing consumer opinions.
With penetration pricing, the rewards arrive sooner, including:
- Awareness building: The new products receive recognition among potential buyers.
- Creating preferences: A penchant for the new products takes hold among consumers.
- Customer diversion: Loyal consumers of competitors are poached away.
- Customer base development: A robust customer base is developed to secure market share.
- Immediate demand generation: The strategy generates unprecedented demand in little time.
- Achieving economies of scale: Greater sales allow companies to maintain lower costs.
- Leveraging learning curve effects: Improvements in production efficiency are reaped sooner.
The strategy's success hinges upon several factors:
1. Elastic demand: When the price falls, demand rises at a higher rate than the price decrease. In essence, consumers are sensitive to pricing and may seek out new products given an affordable price tag.
2. Economies of scale: Companies bring down costs as sales volume increases, leading to improved profit margins.
3. Mass-market appeal: The product caters to a vast segment of consumers who are more inclined towards competitive pricing.
4. Limited differentiation: The product doesn't stand out significantly from competitors' offerings.
5. Market growth: Rapid growth in the market provides an ideal setting for companies to expand their customer base quickly.
However, pitfalls lurk in the shadows:
1. Intense competition: As soon as a product hits the market, competitor reactions set in, potentially leading to an escalating price war.
2. Similar product features: The quality and characteristics of various products aren't drastically different, making consumers more susceptible to newly introduced, affordably priced products.
3. Market maturity: In a mature market, sales growth is limited to repeat purchases. In these conditions, a company seeking to capture market share would often target existing customers from competitors instead.
In the heat of implementation, companies face diminished profits due to reduced price margins. This challenge lingers only temporarily, as profits gradually improve as sales volumes increase. However, the success of the strategy relies heavily on its subsequent action plan and the loyalty of its customer base.
- Investing in a new business can be profitable when employing penetration pricing strategies, as demonstrated by Dell in the early days of their laptop sales, offering high-quality machines at reasonable prices to attract consumers and generate immediate demand.
- For businesses looking to penetrate a mature market, penetration pricing could be a strategic move to capture market share, especially when competition is less intense, product features are similar, and there is room for market growth. This approach can help create preferences, build brand awareness, and develop a robust customer base, ultimately generating economies of scale.
