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.
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.
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.
- 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.