Market Penetration Pricing: Strategy & Example

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  • 0:00 Definition
  • 0:25 Strategy
  • 1:19 Advantages and Disadvantages
  • 2:12 Example
  • 2:57 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Sometimes a business will undercut its competition's pricing to gain a solid market share. In this lesson, you'll learn about penetration pricing strategy. You'll also have a chance to take a short quiz to reinforce your knowledge.

Definition

Penetration pricing is a strategy employed by a business to structure the pricing of its product to build its market share quickly at the expense of a greater profit margin, which the business hopes to make up with sales volume. The strategy works well with products that are consumed quickly, like groceries, but not so well with products that are not consumed quickly, like cars.

Strategy

You can use a couple of different approaches with penetration pricing. One approach is to offer a free sample of your product along with a discount for the purchase of the full-sized product. For example, you may have received a small packet of perfume in the mail along with a coupon offering a 20% discount on the purchase of a bottle of it. The discount will usually make the product somewhat cheaper than the full-price of competing products of the same quality. The idea is to get you to try the product, hope that you like it and then further entice you to purchase it by offering a discount.

Another approach you can use is to storm into the market with your new product at a discount price that is well below the price of your competition. This strategy may be employed when you are entering into an entirely new market without any brand recognition and there is a significant degree of competition. Eventually, once you gain market share and customer loyalty, you'll start to gradually increase the price.

Advantages and disadvantages

Market penetration pricing has some advantages, as you have probably already noticed. It can be a very effective method to quickly enter a market and claim a large chunk of it. The lower price also tends to create a high volume of sales that will offset lower profit margins. Finally, the increase in sales volume will strengthen your brand recognition and customer loyalty.

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