Market Penetration Pricing

Rather than setting a high initial price to skim off small but profitable market segments, some companies use market-penetration pricing. They set a low initial price in order to penetrate the market quickly and deeply - to attract a large number of buyers quickly and win a large market share. The high sales volume results in falling costs, allowing the company to cut its price even further. For example, Dell and Dan used penetration pricing to sell high-quality computer products through lower-cost mail-order channels. Their sales soared when IBM, Compaq, Apple and other competitors selling through retail stores could not match their prices. The Bank of Scotland and Winterthur of Switzerland used their Direct Line, Privilege and Churchill subsidiaries to grab profits and share in the motor insurance market by selling direct to consumers at market-penetrating prices. The high volume results in lower costs that, in turn, allow the discounters to keep prices low.7

Several conditions favour setting a low price. First, the market must be highly price sensitive, so that a low price produces more market growth. Second, production and distribution costs must fall as sales volume increases. Finally, the low price must help keep out the competition - otherwise the price advantage may he only temporary. For example, Dell faced difficult times when IBM and Compaq established their own direct distribution channels.

market-penetration prioirig

Setting a low price ft>r a new product in order to attract large numbers of buyers and a large market share.

Home Depot practices market-penetration pricing. It charges 'guaranteed loto prices, day-in . . . day-out' to attract high volume, which in turn results in lower costs and still lower prices.

Product-Mix Pricing Strategies

The strategy for setting a product's price often has to he changed when the product is part of a product mix. In this case, the firm looks for a set of prices that maximizes the profits on the total product mix. Pricing is difficult because the various products have related demand and costs, and face different degrees of competition. We now take a closer look at five product-mix pricing situations, summarized in Table 17.1.

product line pricing Setting the price steps beMoeen "carious products in a product line baaed on uost differences between the products, customer evaluations of different features, and competitors'prices.

Insiders Guide For Making Money with Garage Sales

Insiders Guide For Making Money with Garage Sales

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