Advantages and disadvantages of penetration pricing
Answers
Explanation:
High adoption and diffusion: Penetration pricing allows a product or service to be quickly accepted and adopted by customers.
Marketplace dominance: Competitors are typically caught off guard in a penetration pricing strategy and are afforded little time to react. The company is able to utilize the opportunity to switch over as many customers as possible.
Economies of scale: The pricing strategy generates high sales quantity that allows a firm to realize economies of scale and lower marginal cost.
Increased goodwill: Customers that are able to find a bargain in a product or service are likely to return to the firm in the future. In addition, the increased goodwill creates positive word of mouth.
High turnover: Penetration pricing results in an increased turnover rate, making vertical supply chain partners such as retailers and distributors happy.
Disadvantages of Penetration Pricing
Pricing expectation: When a firm uses a penetration pricing strategy, customers often expect permanently low prices. If prices gradually increase, customers will become dissatisfied and may stop purchasing the product or service.
Low customer loyalty: Penetration pricing typically attracts bargain hunters or those with low customer loyalty. Said customers are likely to switch to competitors if they find a better deal.
Damage brand image: It may affect the brand image and cause customers to perceive the brand as cheap.
Price war among competitors: It results in retaliation from competitors trying to maintain their market share. Pricing war may decrease profitability for the overall market.
Inefficient long-term strategy: It is not a viable long-term pricing strategy. In many cases, firms that use the strategy face a loss of profits. In this case, the firm may not be able to recover its cost if it uses penetration pricing over an extended timeframe.