10 Penetration pricing strategy Penetration pricing is the charging of low prices when a product is initially launched in order to gain rapid acceptance of the product. Once market share is achieved, prices are increased.
The circumstances which favour a penetration policy are as follows:
§ If the firm wishes to discourage new entrants from entering the market.
§ If the firm wishes to shorten the initial period of the product’s life cycle in order to enter the growth and maturity stages as quickly as possible.
§ If there are significant economies of scale to be achieved from high-volume output, and so a quick penetration into the market is desirable in order to gain those unit cost reductions.
§ If demand is highly elastic and so would respond well to low prices.
§ For penetration pricing to be effective:
§ The total market in which the firm is operating must be substantial
§ The anticipated market share must be significant.
Penetration pricing, if exploited to the full, becomes predatory pricing; its objective is to eliminate competition through use of unsustainably low prices. Predatory pricing is illegal.
Illustration 12 – Penetration pricing strategy
The 2006 launch of Microsoft’s anti-virus product, Windows Live OneCare, was described by commentators as an example of penetration pricing. Microsoft’s competitors in this market (e.g. Symantec and McAfree) reportedly lost material market share within a few months of its launch.
Test your understanding 10
Which of the following are often features of penetration pricing?外语学习网
1 A substantial price reduction to gain market share following the use of a successful market-skimming strategy
2 Demand is inelastic allowing acceptance of increased prices with little reduction in demand.
3 Production runs are usually of small size since unit cost is not an issue.
4 A high initial price followed by a substantial price reduction. |
发表于 2012-2-23 17:09:42
