Penetration strategy

It is low price strategy, designed to infiltrate markets and achieving a large market share. This strategy works only when the price elasticity of demand for the product is high enough, to cause large increase in the sales volume after price drop. A high sales volume and a large market share leads to lower costs. The use of economies of scale, as well as the effect of experience cause reduction in unit costs.

Applications

In industries where a significant part of the cost is reduced with the help of economies of scale and economies of experience, it is reasonable to use penetration strategy to gain a large market share. This is the right thing to do, when the company has the necessary resources to implement this strategy. To needed resources here include: production and distribution capacity, which are used to satisfy high demand caused a successful implementation of this strategy.

Penetration strategy in marketing refers to a tactic where a company lowers its prices in order to gain market share and increase its customer base. This strategy can be used in a variety of ways and can be applied to various marketing situations. Some common applications of penetration strategy in marketing include:

• New market entry: A company entering a new market may use a penetration pricing strategy to quickly gain market share and establish its brand.
• Product launch: A company launching a new product may use a penetration pricing strategy to attract customers and generate buzz.
• Competitive response: A company may use a penetration pricing strategy to respond to a competitor's price cut or to gain market share from a competitor.
• Seasonal promotions: A company may use a penetration pricing strategy during specific periods of the year, such as holidays or end-of-season sales, to increase sales and clear inventory.
• Market saturation: A company may use a penetration pricing strategy to continue to grow its market share in a saturated market.
• Digital products: Many digital products like software, apps, games and subscription services use penetration pricing strategy to attract more customers and increase their user base.
• Bundle strategy: Companies may use a penetration pricing strategy to bundle their products or services with other products or services at a discounted price in order to increase sales.
• Regional targeting: Companies may use a penetration pricing strategy to target specific geographic regions or demographic groups in order to increase market share in those areas.

Overall, penetration strategy can be used in many different ways, but the goal is always the same: to increase market share and customer base by offering lower prices or better value than the competition.

Risk

The risks associated with the use of this strategy relates to the reaction and the possibility of retaliatory actions of competitors and product image compromise due to low prices. Competitors may bring their prices down to the level of the company, destroying relative advantage, if the product concerned is not sufficiently differentiated from products of competitors. Low price poses a threat to the image of the company mainly when the link between price and quality is almost immediately visible.

Penetration strategy — recommended articles

Prestigious price strategy — Skimming pricing strategy — Market niche strategy — Preventive pricing strategy — Market maturity — Imitator strategy — Brand leader — Product line pricing — Price strategy to eliminate competitors

References

• Du, P., & Chen, Q. (2014). Skimming or penetration: Optimal pricing of new fashion products in the presence of strategic consumers. Annals of Operations Research, 1-21.