Penetration pricing is the practice of setting a low initial price for a product or service to entice customers. It is a competitive marketing strategy that aims to increase sales by attracting a wide number of customers to new products at initial low prices. Along with great customer service, advertising, promotions, and other marketing strategies, penetration pricing can help increase your revenue and grow your business. Show Penetration pricing is designed to entice discriminating customers searching for the lowest prices. It involves initially pricing items or services lower than the competition to attract a large number of customers. NoteHaving the lowest price among your competitors will immediately draw attention to your business. Buy-one get-one-free (BOGO) is a common penetration pricing strategy, as is heavily discounting an item or offering it for free when purchased with a related product. For retailers, the objective of penetration pricing is to attract customers to your business in the hope that:
NotePenetration pricing generally works best when you are the first, or one of the first, to market with a new product. As with any marketing strategy, there are advantages and disadvantages to penetration pricing that should be considered before implementing this plan. Advantages of Penetration PricingThe advantages of this type of marketing practice include:
In addition, if you sell enough of your product or service at the lower price, you may be able to take advantage of economies of scale and maintain a profitable margin by negotiating lower wholesale costs with your supplier, or if you are the manufacturer, implementing newer facilities or production methods that will lower your per-unit costs Disadvantages of Penetration PricingThe disadvantages of using this strategy include the following:
Examples of Penetration PricingThe following examples will help you recognize penetration pricing at work:
Pros
Cons
Predatory PricingPredatory pricing is penetration pricing taken to extreme levels to drive competition out of the market and establish a monopoly, with the eventual goal of normalizing prices after the competition has disappeared. Predatory pricing is illegal under anti-trust laws in most jurisdictions but is generally difficult to prove and is viewed by the courts as beneficial to consumers, at least, in the short run. ConclusionIn today's competitive marketplace, retailers must constantly think of new ways to attract customers to keep their businesses viable. One strategy is penetration pricing, which initially sets the price of new products or services below the competition. It's important to weigh the pros and cons of this practice before implementing it to minimize the risk of it negatively impacting your business. Also, once you've brought customers to your door, you will need to consider how to keep them. Why is predatory pricing illegal?Because predatory pricing is designed to drive other competitors out of the market, it is typically viewed as an attempt to gain an illegal monopoly. Antitrust laws are designed to preserve market competition and minimize monopoly power. To that end, most forms of predatory pricing are illegal.
Is destroyer pricing illegal?Destroyer pricing
Usually only large businesses can use this strategy as they can withstand the losses for a longer period than small businesses can. Destroyer pricing is illegal in the UK.
Is undercut pricing illegal?California's below-cost statute makes it illegal to sell any article or product at less than cost, or to give away any article or product, for the purpose of injuring competitors or destroying competition. After losing sales because of The Grocer's pricing, the competitor down the street sued The Grocer.
What is predatory pricing an example of?Predatory pricing is a monopolistic practice, and there is a long history of legislation against monopolistic behavior in the United States, with predatory pricing coming under that banner.
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