{"id":4225,"date":"2016-01-09T06:53:50","date_gmt":"2016-01-09T06:53:50","guid":{"rendered":"https:\/\/courses.candelalearning.com\/waymakerintromarketing1xmaster\/?post_type=chapter&#038;p=4225"},"modified":"2024-05-15T15:37:31","modified_gmt":"2024-05-15T15:37:31","slug":"reading-penetration-pricing","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/chapter\/reading-penetration-pricing\/","title":{"raw":"Reading: Penetration Pricing","rendered":"Reading: Penetration Pricing"},"content":{"raw":"<h3><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/903\/2016\/02\/23230442\/6965646827_6cdf21b99d_o.jpg\" rel=\"attachment wp-att-5934\"><img class=\"aligncenter wp-image-5934\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/903\/2016\/02\/23230442\/6965646827_6cdf21b99d_o-1024x682.jpg\" alt=\"Three birds on the water. Their butts are stuck up in the air as the birds' heads dive beneath the water.\" width=\"500\" height=\"333\" \/><\/a><\/h3>\r\n<h2>What Is Penetration Pricing?<\/h2>\r\nPenetration pricing is a pricing strategy in which\u00a0the price of a product is initially set low to rapidly reach a wide fraction of the market and initiate word of mouth.[footnote]J Dean (1976). \"Pricing Policies for New Products.\" <em>Harvard Business Review<\/em> 54 (6): 141\u2013153.[\/footnote]\u00a0The strategy works on the assumption\u00a0that customers will switch to the new\u00a0product\u00a0because of the lower price. Penetration pricing is most commonly associated with marketing\u00a0objectives of enlarging market share and exploiting economies of scale or experience.\r\n\r\nReturning to our economic model, below, you can see that penetration pricing focuses at the bottom of the demand curve. If the initial price is set low, at $2, for instance, the quantity demanded will be high: 400 units.\r\n\r\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/903\/2016\/02\/23230434\/penetration.png\" rel=\"attachment wp-att-5896\"><img class=\"aligncenter wp-image-5896\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/903\/2016\/02\/23230434\/penetration.png\" alt=\"Penetration. As price decreases by $1, quantity demanded increases by 100. At 2 dollars, the quantity demanded is 400.\" width=\"500\" height=\"387\" \/><\/a>\r\n\r\nPenetration pricing offers a lower price in order to draw in a higher demand from consumers.\r\n<h2>Why Might Penetration Pricing Make Sense?<\/h2>\r\nLike skim pricing, penetration pricing shows an awareness of the dynamics in the product life cycle. The advantages of penetration pricing to the firm are the following:<sup id=\"cite_ref-5\" class=\"reference\"><\/sup>\r\n<ul>\r\n \t<li>It can result in fast diffusion\u00a0and adoption across the product life cycle. The strategy\u00a0can achieve high market penetration rates\u00a0quickly, taking\u00a0competitors by surprise and not giving them time to react.<\/li>\r\n \t<li>It can create goodwill among the Innovators and Early Adopters, which\u00a0can generate\u00a0more demand via\u00a0word of mouth.<\/li>\r\n \t<li>It establishes\u00a0cost-control and cost-reduction pressures from the start, leading to greater efficiency.<\/li>\r\n \t<li>It discourages the entry of competitors.<\/li>\r\n \t<li>It can generate\u00a0high stock turnover throughout the distribution channel, which creates\u00a0important enthusiasm and support in the channel.<\/li>\r\n<\/ul>\r\nThe main disadvantage of\u00a0penetration pricing is that it establishes long-term price expectations for the product and image preconceptions for the brand\u00a0and company. Both can\u00a0make it difficult to raise prices later.\u00a0Another potential disadvantage is that the low profit margins may not be sustainable long enough for the strategy to be effective.","rendered":"<h3><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/903\/2016\/02\/23230442\/6965646827_6cdf21b99d_o.jpg\" rel=\"attachment wp-att-5934\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-5934\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/903\/2016\/02\/23230442\/6965646827_6cdf21b99d_o-1024x682.jpg\" alt=\"Three birds on the water. Their butts are stuck up in the air as the birds' heads dive beneath the water.\" width=\"500\" height=\"333\" \/><\/a><\/h3>\n<h2>What Is Penetration Pricing?<\/h2>\n<p>Penetration pricing is a pricing strategy in which\u00a0the price of a product is initially set low to rapidly reach a wide fraction of the market and initiate word of mouth.<a class=\"footnote\" title=\"J Dean (1976). &quot;Pricing Policies for New Products.&quot; Harvard Business Review 54 (6): 141\u2013153.\" id=\"return-footnote-4225-1\" href=\"#footnote-4225-1\" aria-label=\"Footnote 1\"><sup class=\"footnote\">[1]<\/sup><\/a>\u00a0The strategy works on the assumption\u00a0that customers will switch to the new\u00a0product\u00a0because of the lower price. Penetration pricing is most commonly associated with marketing\u00a0objectives of enlarging market share and exploiting economies of scale or experience.<\/p>\n<p>Returning to our economic model, below, you can see that penetration pricing focuses at the bottom of the demand curve. If the initial price is set low, at $2, for instance, the quantity demanded will be high: 400 units.<\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/903\/2016\/02\/23230434\/penetration.png\" rel=\"attachment wp-att-5896\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-5896\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images-archive-read-only\/wp-content\/uploads\/sites\/903\/2016\/02\/23230434\/penetration.png\" alt=\"Penetration. As price decreases by $1, quantity demanded increases by 100. At 2 dollars, the quantity demanded is 400.\" width=\"500\" height=\"387\" \/><\/a><\/p>\n<p>Penetration pricing offers a lower price in order to draw in a higher demand from consumers.<\/p>\n<h2>Why Might Penetration Pricing Make Sense?<\/h2>\n<p>Like skim pricing, penetration pricing shows an awareness of the dynamics in the product life cycle. The advantages of penetration pricing to the firm are the following:<sup id=\"cite_ref-5\" class=\"reference\"><\/sup><\/p>\n<ul>\n<li>It can result in fast diffusion\u00a0and adoption across the product life cycle. The strategy\u00a0can achieve high market penetration rates\u00a0quickly, taking\u00a0competitors by surprise and not giving them time to react.<\/li>\n<li>It can create goodwill among the Innovators and Early Adopters, which\u00a0can generate\u00a0more demand via\u00a0word of mouth.<\/li>\n<li>It establishes\u00a0cost-control and cost-reduction pressures from the start, leading to greater efficiency.<\/li>\n<li>It discourages the entry of competitors.<\/li>\n<li>It can generate\u00a0high stock turnover throughout the distribution channel, which creates\u00a0important enthusiasm and support in the channel.<\/li>\n<\/ul>\n<p>The main disadvantage of\u00a0penetration pricing is that it establishes long-term price expectations for the product and image preconceptions for the brand\u00a0and company. Both can\u00a0make it difficult to raise prices later.\u00a0Another potential disadvantage is that the low profit margins may not be sustainable long enough for the strategy to be effective.<\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-4225\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Revision and Adaptation. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Penetration Pricing. <strong>Provided by<\/strong>: Wikipedia. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/en.wikipedia.org\/wiki\/Penetration_pricing#cite_note-4\">https:\/\/en.wikipedia.org\/wiki\/Penetration_pricing#cite_note-4<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><li>Mallards Feeding. <strong>Authored by<\/strong>: Yankech Gary. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.flickr.com\/photos\/49663413@N08\/6965646827\/\">https:\/\/www.flickr.com\/photos\/49663413@N08\/6965646827\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nd\/4.0\/\">CC BY-ND: Attribution-NoDerivatives<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section><hr class=\"before-footnotes clear\" \/><div class=\"footnotes\"><ol><li id=\"footnote-4225-1\">J Dean (1976). \"Pricing Policies for New Products.\" <em>Harvard Business Review<\/em> 54 (6): 141\u2013153. <a href=\"#return-footnote-4225-1\" class=\"return-footnote\" aria-label=\"Return to footnote 1\">&crarr;<\/a><\/li><\/ol><\/div>","protected":false},"author":20,"menu_order":16,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Revision and Adaptation\",\"author\":\"\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by-sa\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Penetration Pricing\",\"author\":\"\",\"organization\":\"Wikipedia\",\"url\":\"https:\/\/en.wikipedia.org\/wiki\/Penetration_pricing#cite_note-4\",\"project\":\"\",\"license\":\"cc-by-sa\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Mallards Feeding\",\"author\":\"Yankech Gary\",\"organization\":\"\",\"url\":\"https:\/\/www.flickr.com\/photos\/49663413@N08\/6965646827\/\",\"project\":\"\",\"license\":\"cc-by-nd\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"45844f5c-7457-4d81-85b9-bc747938b637","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-4225","chapter","type-chapter","status-publish","hentry"],"part":220,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/pressbooks\/v2\/chapters\/4225","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/wp\/v2\/users\/20"}],"version-history":[{"count":14,"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/pressbooks\/v2\/chapters\/4225\/revisions"}],"predecessor-version":[{"id":9672,"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/pressbooks\/v2\/chapters\/4225\/revisions\/9672"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/pressbooks\/v2\/parts\/220"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/pressbooks\/v2\/chapters\/4225\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/wp\/v2\/media?parent=4225"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/pressbooks\/v2\/chapter-type?post=4225"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/wp\/v2\/contributor?post=4225"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/waymakerintromarketingxmasterfall2016\/wp-json\/wp\/v2\/license?post=4225"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}