A quick-entry price strategy that presumes that sales volume rise when an object is priced low which in turn reduces the overall costs is called market penetration pricing. This is a useful strategy that can be used in price sensitive markets. For example, consider the market for DVD players; this is a market where sales volumes are high, but the number of competitors is high as well.
The production costs of DVD players have fallen drastically and constantly evolving technology has made allowance for the rapid introduction of new features and benefits on new models. The businesses that cash on DVD players and sell high volume at low or reasonable prices are all following a market penetration strategy.
Entrepreneurs using market penetration pricing usually try to grow a market for their brand and in the process penetrate the market for the product as a whole. All calculations are based upon the assumption that the lowest price will win the largest share of the market. But it is very important to evaluate your market, your price sensitivity and your price elasticity or in-elasticity first before you use this pricing strategy.
A certain amount of market research is also necessary in order for you to understand and prejudge how your competitors will react to this penetrating pricing strategy. For example, if your low price makes your competitor to lower price as well it will lead to a dead end as then you will lower your price again causing a similar reaction from him, and this will go on and no one will win.
While what was said earlier is true, it is also true that your market penetration pricing strategy can just be a deterrent for new competitors who are considering entering the market. The risk for a new entrant of getting a sizable market share is extremely high and when they consider how low your price is they will see that their margin will be low and so considering the risks they might choose not to enter the market.
But in order for you to be successful with this strategy, you must be prepared to enjoy the economies of the scale that high sales volume will bring and be the low cost provider in the market.
If you have an existing business and your competitor is following a market penetration strategy, you have to do the same thorough research and evaluation of the market and you own capacities:
- Is it feasible for you to lower your costs?
- Can you be sure that it will produce high volumes?
- Can you take the risk of selling your product at a low price (and hope volume sales will get you the market share and the profitability you want?)
If you answer to all these questions are in the negative, then consider this penetration strategy very carefully before using it and if you are still not sure then don’t t follow the strategy.
However, if you are a new business entrepreneur considering this strategy in a new, or scarcely populated, market, where competition is low, then focus on how to lower your costs and your efficiencies up.
Irrespective of the pricing strategy you decide to use, make sure that you specify it in your marketing mix plan with the reasons for your choice.
Evaluate your chosen marketing strategy including your pricing strategy at least on an annual basis at the time of your business plan update, and ensure it is the right strategy for your product considering the market conditions and for your consumers and competitors.
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