Penetration pricing can increase the likelihood of a price war because it invites the competition to undercut you on price. You drop prices and your competitors drop prices, then you drop prices, and they drop prices … and you’re in a price war. This is not something you hear frequently regarding cable providers. To avoid this, the value of the product needs to be authentic, along with good customer experiences. This is sometimes referred to as predatory pricing. That initial low price gets people in the door but increasing prices later can drive them away again. Poor Customer ExperiencesĬable providers using penetration pricing is a good example of when it can go wrong. It comes with its own set of disadvantages, too. On the flip side, penetration pricing isn’t always the right strategy for brands. The low price brings in new customers and a product that offers good value and quality will keep them around once the price increases. This strategy also has the advantage of improving brand loyalty around a product launch. That is, at least until prices increase-but by that point, a successful strategy will have made the path forward much harder for that competition. In addition, penetration pricing is a plus in some cases because it can keep competition that can’t compete at that price point out of the market. It can also take consumers away from the competition. Penetration pricing works for some brands because shoppers will be interested in that lower-priced option, giving a quick boost in sales and word-of-mouth right at the start. There are several advantages to penetration pricing for brands if the market is right for this type of pricing strategy. Penetration pricing can be effective when there are many competitors, it is designed for a mass market, or economies of scale are possible (such as with Costco in the organic foods example). Skimming can be effective when the product in question is highly innovative, in a premium, luxury market, or if there is limited competition, among other factors. This is relevant because price skimming is the exact opposite of penetration pricing. As we covered in our post about this strategy, price skimming is “when a brand or retailer charges a high price for a product at launch and then reduces that price over a short period of time.” Penetration pricing isn’t the only product-launch pricing strategy out there, however.
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