Penetration pricing is a strategy using which company charges lower price upfront for its products so as to gain consumer and once the product finds acceptance among consumers then the company gradually increases the price of the product. In order to understand this concept better let’s look at some of the important features of penetration pricing –
- The first and foremost feature of penetration pricing is that this strategy is that it is used by the company while launching new products only and it cannot be used by the company on existing or established products.
- Another feature of penetration pricing is that chances of profit during initial stages is next to nil as company’s objective is not to earn profits but to establish the product and hence this type of strategy requires patience on the part of company as it cannot expect to earn profits from day 1 of launch of the product.
- Penetration pricing is normally introduced for those products which have high competition because in a highly competitive market pricing has a huge role in attracting consumers from competitive companies and that is the reason why this is strategy is used in industries like consumer durables, telecom etc.., where there is stiff competition.
- Penetration pricing is used mainly for those products which can be produced in bulk so for example, real estate industry cannot adopt penetration pricing or for that matter Boeing aircraft seller cannot adopt this strategy. In short, industries, where bulky products and products of specialized nature are made, cannot use penetration.
- Another feature of penetration pricing is that there is a sense of achieving efficiency in the company right from production to marketing to sales because all know that profit margin is very low because of the low price and there is no scope for any wastage of resources, time and money if a company is adopting penetration pricing strategy.
- Another feature of penetration pricing is that company will find it difficult to increase the price of a product because it may result in consumers abandoning the product and hence company has to add value or extra features to existing product and then sell the product at higher rate so as to achieve the dual task of increasing the price and retaining the customer base.
As one can see from the above that penetration pricing is a tricky strategy because, on the one hand, it helps the company in achieving higher sales but on the other hand due to low price of the product the profit margins are limited and hence company should consider both higher sales and lower profit margins before deciding whether to adopt penetration pricing strategy or not.