Penetration pricing is one of the pricing strategies used by companies when the objective of the company is to set its foot in the market. Under this strategy company initially sets low price for its product or service and then gradually increase the price once the product or service has developed good customer base. Given below are the various advantages and disadvantages of penetration pricing –
Advantages of Penetration Pricing
- One of the biggest advantages of penetration pricing is that it creates customer base quickly due to low price of product because all other factors takes backseat when price offered by the company for a product is low as majority of customers are price conscious and that is the reason why company adopting penetration pricing enjoys good growth in sales when the new product is introduced in the market.
- Penetration pricing helps company in capturing market share from its competitors because under this strategy price set for products sold by company are lower and because of low price there is not much competitors can do during initial phase and hence companies looking to gain market share at cost of profits adopt penetration pricing strategy.
- Another advantage of penetration pricing is that in improves overall efficiency of the company because all workers in the company are aware that price will be fixed at low level and due to this all their efforts are targeted to make sure that cost in producing the product is kept low which in turn results in product being manufactured in cost efficient way. It can be better understood with the help of an example, when we are student there is a difference in the time we devote towards studies when exams are 2 month away as compared to exams which are 2 day away. In the same way cost efficiency of workers would be different if they are told that company would be adopting price skimming strategy rather than penetration pricing strategy.
- Another advantage of penetration pricing is that it helps in eliminating the competitors because many players in the industry will not be able to sell the product at same price as company which has adopted penetration pricing and therefore their market share and sales will fall leading to losses and if they are not able to do something about then eventually they will go out of market and hence in long term it will benefit the company which has adopted penetration pricing.
Disadvantages of Penetration Pricing
- The biggest disadvantage of penetration pricing is that company is sacrificing the profit in initial phase when product is new and there is enthusiasm and demand from customers for the product. We all know that when product is new all customers want to have that product and that is time when company can extract maximum profit, but as the product goes old enthusiasm of customers also gets dwindled and in that case company cannot increase the price which is the case in penetration pricing because in this strategy price are initially set low and then increased at later stage.
- Penetration pricing is not ideal for those products which are technologically driven because the main idea behind this strategy is to create long term customer base and then charge premium prices from them whereas in case of technology it changes so fast that company will not have that luxury of charging premium from its customers at later stages of product life cycle.
- Penetration pricing may not create loyal customer base and may attract only those customers who are on the lookout for a profitable deal rather than those consumers who are quality and brand conscious and chances are they will abandon the product once they find better deal in terms of price elsewhere.
As one can see from the above that penetration pricing has advantages as well as disadvantages and therefore the company looking to introduce penetration pricing strategy for its product should ponder about above points then decide whether it wants to introduce this strategy for its products or not.