Price Penetration
🛑 ALL INFORMATION CLICK HERE 👈🏻👈🏻👈🏻
Price Penetration
Setting an initially low price to attract customers and quickly gain market share
Home › Resources › Knowledge › Strategy › Penetration Pricing
We and selected partners, use cookies or similar technologies as specified in the cookie policy . With respect to advertising, we and selected third parties , may use precise geolocation data and actively scan device characteristics for identification in order to store and/or access information on a device and process personal data (e.g. browsing data, IP addresses, usage data or unique identifiers) for the following purposes: personalised ads and content, ad and content measurement, and audience insights; develop and improve products . You can freely give, deny, or withdraw your consent at any time by accessing the advertising preferences panel . You can consent to the use of such technologies by closing this notice.
Penetration pricing is a pricing strategy that is used to quickly gain market share Total Addressable Market (TAM) Total Addressable Market (TAM), also referred to as total available market, is the overall revenue opportunity that is available to a product or service if by setting an initially low price to entice customers to purchase. This pricing strategy is generally used by new entrants First Mover Advantage The first mover advantage refers to an advantage gained by a company that first introduces a product or service to the market. The first mover advantage into a market. An extreme form of penetration pricing is called predatory pricing.
It is common for a new entrant to use a penetration pricing strategy to quickly obtain a substantial amount of market share. Price is one of the easiest ways to differentiate new entrants from existing market players. The overarching goal of this pricing strategy is to:
Situations where penetration pricing works effectively:
A current small-sized player in the marketplace where laundry detergent sells at around $15. Company A is an international company with a large amount of excess production capacity and is, therefore, able to produce laundry detergents at a significantly lower cost. Company A decides to enter the market, employ a penetration pricing strategy, and sell laundry detergent at a sale price of $6.05. The company’s cost to produce laundry detergent is $6.
With a marginal cost of $6 and a sale price of $6.05, Company A is making nominal profits per sale. However, the company is comfortable with this decision as its overarching goal is to switch customers over, capture as much market share as possible, and utilize economies of scale with their high production capacity.
Company A believes that its competitor will not be able to sustain itself in the long-term and will eventually exit the market. When the competitor exits the marketplace, Company A will become the only seller of laundry detergent and therefore be able to establish a monopoly Monopoly A monopoly is a market with a single seller (called the monopolist) but many buyers. Unlike sellers in a perfectly competitive market, a monopolist exercises substantial control over the market price of a commodity/product. over the market and raise prices to a level that will provide a high profit margin.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ FMVA® Certification Join 350,600+ students who work for companies like Amazon, J.P. Morgan, and Ferrari certification program, designed to help anyone become a world-class financial analyst. To keep learning and advancing your career, the additional CFI resources below will be useful:
Learn to perform Strategic Analysis in CFI’s online Business Strategy Course ! The comprehensive course covers all the most important topics in corporate strategy!
Penetration Pricing
Penetration Pricing - Definition, Example, Advantages and Disadvantages
Penetration Pricing (Definition, Example) | Advantages and Disadvantages
Penetration pricing - Economics Help
Penetration pricing explained with examples and case study
Investment Banking Training (117 Courses, 25+ Projects) 4.9 (831 ratings) 117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access | Certificate of Completion
Penetration Pricing vs Price Skimming
Advantages and Disadvantages of Penetration Pricing
Investment Banking Training (117 Courses, 25+ Projects)
117 Courses
25+ Projects
600+ Hours
Full Lifetime Access
Certificate of Completion
LEARN MORE >>
Penetration Pricing refers to a pricing policy generally used by a new entrant in the market, in which the price of the product is set at disruptively lower levels in order to gain the market share and therefore penetrate the market by attracting customers from its competitors.
A Telecommunication company, which is new in the market, comes up with an offer to provide one-month free internet services to its subscribers. This is an example of penetration pricing since, the telecommunication company, in order to enter the market, has offered to provide its internet services for free for an initial period of one month.
Consider the following diagram, which explains how the concept of penetration pricing works.
Here, the price of a product and quantity expected to be sold are represented on the vertical and the horizontal axis respectively. Thus, against price “P1”, a quantity that is expected to be sold is “Q1”. The price is kept at a relatively higher side and as a result, less quantity of goods is expected to be sold. If the price is further reduced to P2, even more quantity i.e. Q2 could have been sold. Thus, the graph represents that a lower price attracts the sale of higher quantity, which is the subject matter in case of penetration pricing.
Penetration Pricing is generally used by sellers who are new to the already developed economy . When a seller enters an existing market of an existing product, he may find it difficult to attract customers, being a newcomer. Such a seller can introduce penetration pricing and thereby reduce the prices of its product for an initial period of time so that customers are attracted to leave the competitors and connect with the seller. Sellers usually adopt this strategy for a particular set of products and simultaneously continue to sell the other products at their normal prices so as to maintain a reasonable profitability margin. The strategy is useful for those products where the demand is elastic to its price.
Penetration pricing is a pricing strategy wherein a seller introduces its products at a low price for a particular period of time in order to attract a larger market share. The school of thought behind the strategy is that lower prices will attract more customers and help a company to develop a good market share by shifting the focus of the customers from the competitors to the company. Afterward, the company increases back the price of the product to its normal price.
On the other hand, price skimming is a pricing strategy wherein a company aims to maximize its profits by charging high prices for its newly introduced product. Thereafter, the prices are reduced to a normal price. This type of pricing strategy is adopted in case of unique products for which the customers may be willing to pay higher prices. A classic example of the price skimming policy is high technology-driven mobile phones, wherein owing to the features of the phone, customers are willing to pay higher prices.
Based on the type of the product and the level of competition one may decide whether it will be beneficial to opt for the penetration pricing or other pricing strategies such as skimming pricing strategy.
This has been a guide to Penetration Pricing and its definition. Here we discuss the strategy of penetration pricing along with an example, advantages, disadvantages, and differences from price skimming. You may learn more about Financing from the following articles –
Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute. Return to top
This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy
Special Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More
Cabela S Outdoor Adventures
Nudist Free Beaches
First Time Xhamster
Spy Nudist Beach
3d Hentai Overwatch
