Penetration pricing strategy is generally used by late comers in the market. This pricing is typically used when the market is saturated or there are already many variants of the same product present in the market. Penetration pricing gives an edge to the company because many customers are attracted on the basis of price, or value for money and switch brands to adopt the brand offering low pricing on similar products.
Many times when you enter into supermarkets, you are show signs of “special introductory offers”, the classical sign of penetration pricing strategy. There are dozens of soaps and shampoo’s, all with different price points. Most of the times, you will find the price cheaper for those products, where there is little product differentiation and the demand is price elastic. Customers will not care about the brand when they can get the same product for the same quality at lower prices.
From the marketing objectives point of view, the strategy can lead to very interesting results if we were to look at the increase in market share and sales volumes due to use of penetrative pricing. When you lower prices, the sales volume increases and market share too may increase. By setting lower prices than your competitors you also create barriers for the new entrants into the market. Even though they might consider a similar strategy as yours, once you approach the market through a penetration pricing strategy, only the product’s profitability and efficiency can dictate whether they can be successful or not as the focus should be on minimizing unit costs right from the start.
A drawback of price penetration depends on the kind of customers you are targeting and whether you are looking for brand loyalty in your customers? The penetration pricing might attract the wrong kind of customers, who are more interested in the cheap price focusing on the bargain, rather than the ones who will become loyal to your brand. This is an inherent nature of the penetration strategy, where you yourself are breaking the customer from another brand and attracting him to your brand.
Consider having 10 kinds of cheese, very similar in quality. According to your budget, you will probably chose the cheapest one. Then, after one month, the prices rise, more or less equivalent with the others. So you stop buying the respective brand. The low initial price has created an expectation of permanently low prices amongst consumers. Thus, if you are not able to meet margins, and if you increase prices, the customer might switch again. The customer might leave your brand altogether, if another competitor is consistently offering the same quality of product at lower prices.
Penetration pricing in the Smartphone market
Take the example of the Smart phone market. Apple came in the market with an astounding operating system and took away the market with skimming price. Later on, Samsung entered the market with penetration pricing, taking away the smart phone market from Apple. After that, Apple remained at Skimming price due to its brand building efforts. But Samsung’s market share was taken away by Micromax which used penetration strategy. And now Micromax is facing competition from other brands which are penetrating the market. Thus, the customer who is price sensitive will keep switching to cheaper brands where he gets more value for the same money or same value for lesser money.
However, even though the company might have to stay on it toes to apply the penetration strategy, if the strategy is applied correctly, it can be a very successful marketing strategy. Some industries like telecom, airlines, tourism etc are the best examples of industries where competition is very high and penetrative pricing works miracles. When you have an offer on an international tour, when you get huge discounts on calling rates, or when the airlines turn cheap for a month, you will see the maximum sales happening. Thus, we can see that penetration pricing has its own success and failure ratio. Not every brand with penetration pricing succeeds, but not every brand fails with it.
Case study for Penetration pricing with example of brand Mokai – A cider brand
Top Danish cider brand Mokai has been trying to approach the East African market with initial focus on Tanzania. As part of the market research and strategy, they have been analyzing their competitors and what kind of ciders can already be found on the market. As the Tanzanian alcohol market can be described as quiet mature, one of the most powerful ciders on the market being Savanah. Despite some differences in taste and design as well as target market, as Mokai is generally targeting the female sector compared to Savanah which is targeting both genders, Mokai had to come up with a strategy to capture consumers of Savanah.
So they have been entering the market through a penetration pricing strategy, by offering a low price for their cider during the introductory phase. The main purpose was to increase market share and sales volume. In the long term, their plans were to reduce the production costs. However, increase in the sales volumes did not necessarily lead to high profit as prices were kept too low. The result ? The product failed to correctly integrate into the Tanzanian market. The wrong utilization of the penetration pricing strategy accompanied by other factors such as small investment in creating brand awareness and unreliable distribution partners have lead to a complete failure of the Danish cider into the Tanzanian market.