Penetration pricing stimulates the market growth and capture market share by deliberately offering products at low prices. This aims at maximizing profits through effecting maximum sales with a low margin of profit. It is used as a competitive weapon to gain market position.
Advantages of penetration pricing
The advantages of penetration pricing are given below:
1. It helps the marketer capture the market by quick sales.
2. Brand loyalty is built by creating mass demand for the product sold at a lower price.
3. Due to large scale production, substantial economies can be enjoyed.
4. It is used to acquire and hold a share of market in a competitive environment.
5. It discourages the new entrants to the export market. Companies that are new to exporting cannot absorb losses arising out of penetrative price. Thus, potential competition is kept away.
6. By creating a mass market for the product, the company can establish itself as a brand leader. So, customer will not object even to a slight price rise later.
Disadvantages of penetration pricing
1. Low price may not yield sufficient profit to cover up development expenses in short run.
2. If quick sales do not take place, funds will be locked up unnecessarily.
3. The price and quality relationships may bear adverse implications. A lower price may be related to low quality of the product.
4. Once a low price is quoted, it is difficult to rise it later.
5. If the product has a short life cycle and goes out of date within a short period, the loss suffered by the marketer will be huge.