30 October 2021
Penetration pricing is a method for gaining market share particularly used when a new product/service or brand is launched into a mature market.
A classic example was the introduction of Makita Power Tools into the Australian market in about 1973. Initially, Makita was a low priced new market entrant.
In 1973, many Australians were still suspicious of products made in Japan, thinking they were of inferior quality (despite brilliant cameras and cars increasingly growing in quality).
Makita was competing against established power tool brands like Skil and Black & Decker. However, it quickly became obvious that the Makita product was superior. Tradesman learnt the Makita product was both lower cost, more powerful, and practically bullet proof.
By about the mid-eighties, the price of Makita power tools rose considerably and switched pricing from penetration pricing to almost premium pricing. If you wanted a quality Power Tool and could afford it/justify it - you bought Makita. And that is still the case today.
Penetration pricing is used to quickly establish market share through encouraging consumer trial.
The drawback with penetration pricing is, as discussed previously, price sends a quality signal to the consumer. Unless the product is clearly superior for the price category it was launched in, efforts to later move the price up may meet resistance (i..e a drop in market share).
Makita was confident that its product was easily superior to most other products in the Australian Market at the time. Also, imported products were subject to hefty import margins to protect local industry and power tools were high priced items. Even if people initially thought Makita was "cheap Japanese junk" it provided them with the opportunity to afford power tools. Thus consumer trial was achieved.
Another obvious problem is financial capacity. You need to be prepared to subsidize market penetration for an extended period (perhaps even years) until the brand has been established. This requires deep pockets. It also runs the risk of running into potential accusations of product dumping or other unfair competitive practices.
Other pricing strategies:
Pricing strategy overview: