How Is Market Penetration Pricing Defined?

By presenting a new product or service at a lower price during its initial release, firms may draw people to it through the marketing tactic known as penetration pricing. A new product or service can enter the market more easily and draw customers away from competitors by offering a cheaper price. Market penetration Pricing focuses on the tactic of utilizing initially low prices to make a large number of customers aware of a new product.

To retain new customers after prices return to normal levels, a price penetration strategy seeks to persuade consumers to try a new product and increase market share. Examples of penetration pricing include a bank giving a free checking account for six months or an online news website offering one month of a subscription-based service free.

When used properly, penetration pricing, related to loss leader pricing, may be an effective marketing tactic. Both market share and sales volume can frequently be increased by it. A larger sales volume can also result in cheaper production costs and a quicker turnover of inventories. However, retaining new clients is essential to a campaign’s success.

For instance, a business can promote a buy-one-get-one-free (BOGO) promotion to draw clients to a shop or online. Once a transaction has been completed, it is excellent to develop a contact list or email to follow up with the new clients and offer them further goods or services in the future.

Customers may first pick a brand out of curiosity if the low price is part of an inaugural promotion, but if the price starts to rise to or close to the price levels of the competitor’s brand, they may change back.

Because of this, a key drawback of a market penetration pricing plan is that if prices need to stay low to attract new consumers, an increase in sales volume may not translate into an increase in profits. If the rivals cut their prices as well, the businesses may go into a pricing war, resulting in lower prices and fewer earnings for a while.

Companies market new items at cheap prices, with small or no margins, through pricing penetration. In contrast, a skimming strategy entails businesses offering goods at high prices with substantial profit margins. For innovative or high-end items where early adopters have low price sensitivity and are prepared to pay more, a skimming technique works effectively. Producers effectively skim the market to increase their profits. Prices will gradually drop to levels that are competitive with market prices to snag the remaining market share.

Price skimming can be advantageous for small firms or those operating in specialized markets if their goods and services stand apart from those of competitors, are associated with quality, and have a solid brand image.

Market penetration pricing is used by two significant grocery store chains, Costco and Kroger, for the organic products they offer. The margin on groceries is typically quite small. On the other hand, organic food margins are often larger. Additionally, the market for non-organic foodstuffs is expanding far more slowly than the demand for natural or organic items.

As a result, many supermarkets provide a wider variety of organic items at higher costs in order to increase their profit margins.

However Costco and Kroger employ a penetration pricing approach. Organic food is being sold for less money. They are effectively using penetration pricing to grow their wallet share. Although this tactic could be dangerous for small food businesses, Kroger and Costco can do it because of economies of scale. Because they purchase their merchandise in larger quantities and at volume discounts, larger businesses may offer lower costs. Due to their lower expenses, Costco and Kroger can preserve their profit margins while undercutting their competitors’ prices.

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