May lead to price warsĬompanies that adopt price penetration have their prices tied to their competitors. In other cases, pricing a product at a lower end can give an impression of poor quality and low value. Customers may feel betrayed and turn their back against such brands. Moreover, businesses that increase their price suddenly may incur a bad reputation. For example, a new restaurant offering low-priced dishes may struggle to shake off a reputation for subpar food, even if the quality improves over time. If the low prices are associated with poor quality, it can damage the brand's reputation. For instance, if a gym offers a low introductory membership fee, it may face resistance when trying to increase the price later on. Once customers become accustomed to low prices, raising them without alienating the customer base can be challenging. For example, Uber initially offered low prices to attract riders, but this led to reduced profits and challenges in achieving long-term profitability. Penetration pricing often results in lower profit margins, as companies sacrifice profits to gain market share. Here are some limitations to this strategy: Lower profit margins That said, price penetration isn't without any disadvantages. For example, Amazon's low prices on e-books helped them sell more Kindle devices, which in turn allowed them to negotiate better deals with publishers and lower production costs. Economies of scaleĬompanies selling more products through penetration pricing can achieve economies of scale, reducing production costs per unit. For instance, when Xiaomi entered the smartphone market, their competitively priced phones generated significant interest and discussion, leading to increased brand recognition. The lower prices offered through penetration pricing can create a buzz and draw attention to a new product or service, increasing brand awareness. For example, when Netflix entered the streaming market, it offered lower subscription prices compared to traditional cable TV, allowing them to amass a large customer base quickly. Penetration pricing can help businesses quickly capture market share by attracting cost-conscious customers. Price penetration comes with three major benefits: Rapid market share growth Price Penetration Advantages and Disadvantages In this analysis, we will explore the advantages and disadvantages of penetration pricing, along with examples that illustrate each point. However, this strategy also comes with some drawbacks. By offering lower prices initially, companies can draw attention and encourage trial purchases. Penetration pricing can be a powerful tool for businesses to quickly gain a foothold in the market and attract customers to their new products or services. Penetration Pricing Advantages and Disadvantages However, this strategy can prevent healthy competition and is thus banned in many countries. The situation often leads to a monopolistic position, after which the company raises the price to compensate for losses. But before it became one of the world's largest streaming services, Netflix had taken over the DVD rental business.įig. Netflix was founded by Reed Hastings and Marc Randolph in 1997. Now that we've covered the basic theory, let's walk through a couple of examples. The products are subjected to standardization (e.g., Microsoft computer software) The skimming pricing strategy doesn't work - Competition remains high after the introduction stage. The market is large enough with sufficient demand. It is easy to achieve economies of scale. The product has an elastic demand curve (the change in the price affects the product demand significantly). Also, there's a risk of a price war with other competitors. However, the drawback is if the price remains low, the business may not be able to make a sustainable profit. As production costs decrease, the company can manufacture more goods and achieve economies of scale. Higher sales lead to bulk purchases with discounts, which brings down production costs. For example, lower prices can increase the acceptance rate and allow the company to capture a substantial market share in a short period. If appropriately applied, price penetration can bring the company massive success. Once Puzzle Plaza has established its presence and captured a significant market share, the owners gradually increase their prices to align with the market while still retaining their newfound customer base. As the townspeople discover Puzzle Plaza's entertaining games and irresistible prices, word spreads rapidly, making the store a popular destination for families and friends. To draw the townspeople in and introduce them to their unique and engaging games, the owners decide to offer their products at a significantly lower price compared to other board game stores. Imagine a small town where a new board game store, Puzzle Plaza, opens its doors.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |