Advantages of Penetration Pricing
- Adoption and Diffusion
- Not much competition in the initial phase
- Good will among early customers
- Cost efficiency
- Competitors are kept at bay
- Channel benefit
Diffusion is the process of acceptance of a new product or service by the consumers. Adoption is similar to diffusion here the focus is on the psychological acceptance of the product by the consumer. Rate of diffusion or adoption is the speed at which it is accepted. Both adoption and diffusion rates are high when penetration policy is adopted.
When penetration pricing is introduced the competitors are caught unaware. Most importantly it leaves them with very little reaction time. So in the initial phase not much competition is faced.
Happy at having struck a profitable deal the customers are ready to come back to the manufacturer in future. This goodwill created also leads to further promotion of the product through "word of mouth".
The emphasis on keeping the price low helps in controlling the cost thereby cost efficiency is achieved.
If a manufacturer adopts penetration pricing and lowers the price of his products or services he may stop competitors from entering the market. This happens because now the competitors will have to enter the market at lower than existing prices. This reduces their profit not to mention the risk they face as new entrants in acquiring market share.
As this technique creates a quick turnover it keeps its retailers and distributers happy.
Adopting the penetration policy a producer keeps the initial price at an all time low this acts a deterrent to competitors from entering the market. The competitors unable to further lower the price of their product either leave the market or stay away from it. Now that all competition is removed the predator producer increases the price and achieves a monopoly over the market. Critics argue over the probability of its occurrence and possibility of detection. In many countries predatory pricing is considered illegal.
Disadvantages of Penetration pricing
- The customer expects the prices to remain low for a long term. They are not ready for the subsequent rise in the price and when it happens they might switch to a competitor's product. Thus subsequent price hike leads to loss of market share gained.
- It is believed that penetration pricing cannot create strong customer relationship and only attracts customers on the lookout for a profitable deal.
There are two ways by which the subsequent price rise can take place. Either a onetime price hike or over the years a steady increase in price. None of these methods are foolproof. To overcome this situation the manufacturer can keep the short-term and long-term price the same and introduce introductory discounts instead. In this way the customer is aware of the price of the product and is also eager to seize the introductory offer.
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