Price Penetration – fixing a low price so that the product gains market share quickly
(Pronounced prise pen-uh-tray-shn)
To remember what price penetration means use the following mnemonic:
Once they wrote the price with a pen, the trade went mad. The whole nation (price penetration) queued to buy the product because the price was set so low.
In any specific market, there is usually only room for two businesses to be very profitable. Take for example the United States carbonated beverages industry. Coca-Cola Corporation has a 43.7% share (Feb 2022) and PepsiCo Incorporated has a 24.1% share (Feb 2022). Between these two companies that is a total of 68% share. This can be seen in nearly every other market, such as UK universities (Oxford and Cambridge), motorbikes (Honda and Yamaha) and mobile phones (Apple and Samsung). Of course, there are other companies/institutions in each of these fields, but the two biggest make by far the largest profits.
It is therefore imperative that during a new product’s launch, a large market share is gained quickly to achieve the top spot and the largest market share. This will then allow the company to reap benefits in terms of economies of scale and eventual brand loyalty which can then support a higher price.
One marketing tool available to gain market share quickly is to drop the price, which will encourage potential customers to choose your product. This price penetration strategy occurs when several companies launch a similar product simultaneously. If a company knows there will be no competition for a while, for example, due to a patent which prevents competitors from releasing similar products, it will fix a high price (price skimming).
Sometimes, companies try to gain a foothold in a highly competitive market by offering a lower price than their competitors. This penetration pricing strategy will cost the company a lot of money and should only be contemplated if the top two market leaders are poor competitors. It would be wiser for a company to offer an improved service or a greater range than the competitors because acquiring market share means that only one company can be the cheapest. If the competitors decide to follow your lead and lower their prices too, a lot of money could be spent with no market share gained.