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 a low price for its product or service and then gradually increases the price once the product or service has developed a good customer base. Given below are the various advantages and disadvantages of penetration pricing –
Advantages of Penetration Pricing
Creation of Customer Base
One of the biggest advantages of penetration pricing is that it creates a customer base quickly due to the low price of the product because all other factors take a backseat when the price offered by the company for a product is low as the 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.
Capturing Market Share
Penetration pricing helps the company in capturing market share from its competitors because under this strategy price set for products sold by the company are lower and because of low price competitors cannot do anything during the initial phase and hence companies looking to gain market share at cost of profits adopt penetration pricing strategy.
Increase in Efficiency
Another advantage of penetration pricing is that it improves the overall efficiency of the company because all workers in the company are aware that price will be fixed at a 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 the product being manufactured in cost-efficient way. It can be better understood with the help of an example when we were students there is a difference in the time we devote towards studies when exams are 2 months away as compared to exams which are 2 days away. In the same way cost efficiency of workers would be different if they are told that the company would be adopting a price skimming strategy rather than a penetration pricing strategy.
Elimination of Competitors
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 the same price as the company that 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 the market and hence in the long term it will benefit the company which has adopted penetration pricing.
Disadvantages of Penetration Pricing
No Margin Business
The biggest disadvantage of penetration pricing is that company is sacrificing the profit in the initial phase when the product is new and there is enthusiasm and demand from customers for the product. We all know that when a product is new all customers want to have that product and that is the time when a company can extract maximum profit, but as the product goes old enthusiasm of customers also gets dwindled and in that case, a 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 a later stage.
Not Suitable for All Products
Penetration pricing is not ideal for those products which are technologically driven because the main idea behind this strategy is to create a long term customer base and then charge premium prices from them whereas in the case of technology it changes so fast that the company will not have that luxury of charging premium from its customers at later stages of the product life cycle.
No Guarantee of Sucess
Penetration pricing may not create a 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 a better deal in terms of the 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 a penetration pricing strategy for its product should ponder about the above points then decide whether it wants to introduce this strategy for its products or not.