market penetration pricing strategy definition

Knowing which pricing strategy works best for your company is an essential tool for any pricing manager and can only be found by recognizing the lifecycle of your products. In a declining market, only those who still must have your product will purchase it, and just like in an emerging period, they should (and will) pay for that right. In a mature market, a price war will simply start the process of endless and useless competition, destroying your profit margin.

In an emerging market, your product is brand new and customers who want it first should (and will) pay for that right. Penetration strategies fail in the other lifecycle periods by leaving possible profits in the hands of the customers. You’re developing relationships with new customers willing to try the new product but who will only come for a lower price. A penetration strategy works here, and only here, because you’re attracting customers to a new but proven product with cheap productions. This is when your average customer buys a product and when the sales numbers will be the biggest. During growth, your sales are continuing to expand, as your customers want the newest product but still a product that has already tested by others in the emerging period. Penetration strategies only work in one of the four lifecycle periods: growth. Essentially, neutral pricing is the safe way to the play the pricing game.Ī penetration strategy is the price war this strategy goes for the deepest price cuts, driving at every moment to have your price be the lowest on the market. Since the strategy is based on the market and not on your product, your company, or the value of either, you’re also not going to gain market share. The major drawback is that your company is not maximizing its profits by basing price only on the market. The major benefit of a neutral pricing strategy is that it works in all four periods in the lifecycle. In a neutral strategy, the prices are set by the general market, with your prices just at your competitors’ prices. Surprisingly, skimming also works in declining markets, as your diehard customers are willing to pay big bucks for what they see as an older but superior product with a dwindling supply. It also works well in a mature market, where customers have already realized the value of your product and are willing to pay for what they see as a worthwhile investment. This strategy can be employed in emerging markets, where certain customers will always want the newest, most advanced product available. Instead of basing your prices on your competition, a skimming price comes from within the company and the (financial) value your product represents to your customer. Skimming is the process of setting high prices based on value. Knowing these strategies and teaching them to your sales staff, and letting them know which one they should be using, allows for a unity within the company and a defined, company-wide pricing policy. These pricing strategies represent the three ways in which a pricing manager or executive could look at pricing. There are three basic pricing strategies: skimming, neutral, and penetration.

Market penetration pricing strategy definition