High adoption and diffusion: Penetration pricing enables a company to get its product or service quickly accepted and adopted by customers.When the competitor exits the marketplace, Company A will become the only seller of laundry detergent and therefore be able to establish a monopoly over the market and raise prices to a level that will provide a high profit margin. 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.Ĭompany A believes that its competitor will not be able to sustain itself in the long-term and will eventually exit the market. With a marginal cost of $6 and a sale price of $6.05, Company A is making nominal profits per sale. The company’s cost to produce laundry detergent is $6. 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.Ĭompany A decides to enter the market, employ a penetration pricing strategy, and sell laundry detergent at a sale price of $6.05. Illustration and Example of Penetration PricingĪ current small-sized player in the marketplace where laundry detergent sells at around $15. Where the product is suitable for a mass market (and, therefore, for utilizing economies of scale).When there is little product differentiation.Situations where penetration pricing works effectively: Generate significant demand, looking to utilize economies of scale.The overarching goal of this pricing strategy is to: Price is one of the easiest ways to differentiate new entrants from existing market players. It is common for a new entrant to use a penetration pricing strategy to quickly obtain a substantial amount of market share. An extreme form of penetration pricing is called predatory pricing. This pricing strategy is generally used by new entrants into a market. Penetration pricing is a pricing strategy that is used to quickly gain market share by setting an initially low price to entice customers to purchase.
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Updated FebruWhat is Penetration Pricing?