![]() ![]() Another reason is to use excess production capacity that the seller has available its marginal cost to produce using this excess capacity is so low that it can afford to sustain the penetration pricing for quite some time. Another reason is to obtain so much market share that the seller can drive down its manufacturing costs due to very large production and/or purchasing volumes. The first reason is to drive competitors out of the marketplace, so the company can eventually increase prices with little fear of price competition from the few remaining competitors. There are three reasons why someone would engage in penetration pricing. While the seller may not initially make a profit at this low price point, it is building awareness with customers, who may like the features of the seller’s product so much that they stick with it once the seller eventually raises prices back to a more sustainable level. The low price is likely to attract price-sensitive customers, thereby increasing the seller’s market share. This way, the business skims the most profits out of those products, by selling them at different price level and taking advantage of the demand at each level.Penetration pricing is the practice of initially setting a low price for one's goods or services, with the intent of increasing market share. Price skimming is used at a lot of retail businesses, especially for seasonal products, where products are launched at the highest price at the beginning of the season, and then gradually get discounted as time goes by, and at the end of the season they are cleared mostly at or even below their cost value. It is intended to capture the most profits out of the product, by selling at the highest margin possible, and then when demand is exhausted at this price level, the price is reduced to the next lower level, and skims that level until it exhausts it. While penetration pricing launches the product at a much lower price than the current market price, price skimming launches products at an initial high price, that then gets reduced over time. This has prompted big electronics retailers, such as Best Buy to launch price matching guarantees, to defend themselves against this strategy and protect their market share. This strategy has worked, and initiated a phenomenon that was later called Showrooming, where customers went to browse the product at the brick & mortar retailers, but then gave their business to the online retailers who followed this strategy. When ecommerce started taking off a few years back, a lot of players followed the penetration pricing strategy, by offering popular products, such as electronics, at a lower retail price than established brick & mortar stores, in order to gain market share and encourage customers to buy online. Take This Course Penetration Pricing Example In many cases this happens after driving the existing competitors out of business, as they can’t sustain their business by selling at such low price for too long, or they lose their entire market share to the new entrant with the lower price. Usually, the company later on returns back to normal prices, in order to maintain profitability and adequate margins. Penetration pricing is usually intended to be a short-term strategy, unlike Every Day Low Price (EDLP) strategy. This gives the company quick access to the market and quick customer acquisition although those acquired customers might switch back, if the company started raising its prices too soon. ![]() Slide from the Foundations of Economics Courseīased on this dynamic, a company that is entering a new market, where there are established players, can quickly sell its products and gain market share, if it offers those products at a price that is lower than the competition and is attractive enough to entice customers to switch. ![]() That is, the lower the price, the higher the quantity demanded from a certain product. ![]() Penetration pricing is based on the law of demand, which states that there is an inverse relationship between price and quantity demanded for normal goods (there are some exceptions, such as luxury goods). Penetration pricing is a pricing strategy used by businesses that want to penetrate a market quickly, by offering their product at a much lower price than the existing market players, in order to take from their market share. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |