Mataracy
VIP Contributor
Penetration pricing is the practice of pricing at a relatively low level initially in order to achieve a relatively high sales volume and in effect penetrate the market to a greater degree than could be achieved with a higher price. Such a pricing policy is most appropriate for a firm that wants to maximize sales in the short-run or deter the entry of new firms.
Under conditions where entry of new competition is relatively easy in terms of capital,technology and manpower, we would expect penetration pricing strategies, since this would make the product appear much less profitable,if at all profitable for new firms that want to enter.
The conditions that most favourable to penetration are:
High short- run price elasticities with lower long -run elasticities; Economies of scale in production;
the threat of new substitutes which may require restraint in profit making to discourage entry,this is known as stay-out -pricing; and
A favourable impact of sales of the product under consideration on the sales of other company products and on customer goodwill.
In the selection of a skimming price or a penetration price one should consider the difficulties that potential competitors are likely to have copying the new product after they achieve entry .
If the degree of differentiability is low,the initial firm may wish to use penetration pricing in order to establish a broad market base and build goodwill and consumer loyalty for future sales.
So therefore ,penetration pricing is suggested when the nature of the product is such that it will generate a continuing stream of complementary sales.
Under conditions where entry of new competition is relatively easy in terms of capital,technology and manpower, we would expect penetration pricing strategies, since this would make the product appear much less profitable,if at all profitable for new firms that want to enter.
The conditions that most favourable to penetration are:
High short- run price elasticities with lower long -run elasticities; Economies of scale in production;
the threat of new substitutes which may require restraint in profit making to discourage entry,this is known as stay-out -pricing; and
A favourable impact of sales of the product under consideration on the sales of other company products and on customer goodwill.
In the selection of a skimming price or a penetration price one should consider the difficulties that potential competitors are likely to have copying the new product after they achieve entry .
If the degree of differentiability is low,the initial firm may wish to use penetration pricing in order to establish a broad market base and build goodwill and consumer loyalty for future sales.
So therefore ,penetration pricing is suggested when the nature of the product is such that it will generate a continuing stream of complementary sales.