Market Penetration Pricing

Market penetration pricing is the way in which the company tries to maximize the sale volume by reducing the price as low as possible. This strategy is aiming to attract customers by lower price service or product during the initial launch. They expect huge customers well aware of their new product. It is likely to happen during new product launch into the capture of the market share and establish word of mouth.

The company is ready to low down the profit and may operate at losing to obtain the market share. It will work well for a company that has strong financial stability as it will require large funds to operate. However, the company expects to make profit in the near future. They expect to increase the price later, with less impact on the total sale volume.

This strategy is widely used in our daily life, it includes a one-month trial for the subscription service. The company hopes that customers will happy with service purchases after the trial period. This method is completely opposite of Price Skimming.

Market Penetration a

Market Penetration Pricing Example

Oneplus

This Chinese mobile phone company starts selling its first smartphone in 2014, with a price of $ 300-$ 350. It is considered as a cheap flagship at that time. In less than five years later, Oneplus has become the top 5 Global Premium Smartphone market share. The company starts to increase the price of the latest phone to $600- $700 to increase profit. However, it still lower than the competitor whose phone already breaks $ 1,000. It considers one of the success stories of penetration pricing.

Walmart

One of the main strategies of Walmart is to keep the price as low as possible. It increases the total significantly. They keep raising the branches all over the united state. With the huge sale enable it to generate substantial profit, even margin is lower than the competitor.

What are the Advantages of Penetration Price?

Penetration Price Advantage
Increase sale volume for elastic product	It is effective for such normal products with similar features in the market. Customers will try to find substitute products and go for a cheap one.
Discourage competitor from entering the market	We are setting a price lower is like sending a strong signal to the competitors who intend to join the race. They will think twice before decide to compete with us.
Increase market share	Within a short period, we will able to expand our market share if the existing competitors do not retake serious action. It is possible to become a market leader within a short time.
Shorten to reach peak product life	In the product life cycle, it requires sometime after product release to reach its peak. However, this price helps us to reach the peak as fast as possible; it even extends the peak period as long as there is no competitor product with similar features and low prices.
Drive competitor out of the market	If we are the newcomer, this aggressive price strategy will put high pressure on the competitor. They will be facing a massive proportion loss of market share if they do not respond appropriately. For the serious case, they will force to move out of the market or region.
Work well with similar products	In a competitive market where products are very similar and easily substitute, pricing will be the only factor that differentiates us from others. The customers are willing to try the cheap one, and if our product is not significantly low quality from others, they will stick with us.
Decrease cost due to economies of scale	Lowing the price will help us to sell high volumes. In return, it will decrease our production cost as well due to the discount from the supplier on bulk purchase. The higher we sale, the lower we can save on production costs.
Encourage management to cut the cost	This price strategy will generate a right margin, and managers cannot increase the price within a specific time. So they will figure out how to reduce costs by saving time, decrease waste, improve the learning curve. They need to make a profit in order to get a high remuneration package.

What are the disadvantages of penetration price?

Penetration Price Disadvantages
High risk of lose	The company expects the sale will increase dramatically after price deduction. On the other hand, if the sale does not turn well, we will leave with a significant amount of inventory. The cost of loss will be very high.
Negative impact on branding	The customers may believe that the product with much lower prices will have low quality too. They will feel that our company produces the only low-quality product in order to sell at a lower price. It will impact on other products that we sell as well. Customers will consider us as a cheap brand, which makes it hard to increase prices in the future.
Low customer loyalty	It will be hard to build brand loyalty with this kind of low product price. Any price increase in the future will push them to find other substitute products. The customers do not need to loyal to our brand as it just the normal product with plenty of options to select. They are the bargain hunter who keeps following the low price product, not any specific brand.
Not a long term strategy	The company can set this strategy within a short time only, and we can not adopt it in the long term due to low margin and high risk of failure. We will not be able to recover from loss if we keep using this strategy.
Expose to a price war with an existing competitor	The aggressive price discount may be facing a strong response from existing competitors. They will not allow us to take their customers easily. They may decrease their price even lower and lead to the price war in the market. For sure, they can set the price based on relevant cost ( direct material + direct labor ), which has more advantages than the newcomer.