Pricing is a very delicate issue in any business organization thus the need to develop a penetration pricing policy. Pricing determines the level of profitability of any business entity. Decision regarding prices are not just made rashly, but must be carefully made. Prices are set putting various factors into consideration.
Some of those factors would include; Cost of production, overall operating cost, economic policies, and market forces. Sometimes prices are set based on circumstances, by this we mean, it could be a promotional tool to increase sales, an incentive to loyal customers, or as a means of gaining market share for a new product. Sometimes prices are set to either increase or reduce stock movement, or a way or reducing the consumption of certain harmful products or foreign made goods.
Pricing is a very strong tool in business and as such should be used appropriately. We are going to talk about one of the usefulness of pricing.
For a new product that has just been introduced to the market, the pricing policy that will be used will be different from an already existing product. This new product will have to gain market share and also an impression in the hearts of the consumers. While adverts tries to pass the information about the product to the consumer, the price will also help to entice the customer to try out the new product, the price will help to influence the taste and choice of the customer.
How penetration pricing policy can help you gain market share for your new product
This method or pricing policy is usually based on the premise that “A lower price is charged on a product on introduction into the market” with the intention of gaining a reasonable market share for the product and gain reasonable level of acceptance for the product. This policy is usually appropriate, when the product has got close substitute or when there is free entry and exist into the market (open market system). The lower price charged is to discourage potential competitors from producing similar goods and enabling the company to establish a large market share for the product. This can be easily achieved, when the product is new and yet to make a statement in the minds of the customers, then prices can be reviewed upwards after buying habits have been established.
Just like we know, a lot of products have a product life cycle, which consist of four basic stages; Introductory stage which is the stage where penetration pricing policy is most appropriate and strongly advised, the growth stage, maturity stage and the decline stage. After charging a price that will attract and entice the customer at the introductory stage where the product is still fighting for awareness and acceptance, the product then gains ground and moves to the growth stage, because of introductory promotions and greater customer awareness. It is also advised that the introductory stages, it will be appropriate to shade the price upwards or downwards with normal analysis to create for favorable demand.
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in future years. At the maturity stage, a firm will be less concerned of the future effects of the current selling prices and should adopt a selling price that maximizes short-run profits.
Basically the essence of this penetration pricing policy is to provide a watered ground for the introduction of new product to gain the needed growth and substantial amount of the market share. This pricing policy should not be used beyond the introductory stage of the product life cycle, because as the product continues to dominate the market, the will be need to adequately maximize profit, so continuing with that price might affect the profit maximization goal.
A QUICK NOTE
Some products might not necessarily need this type of pricing policy, so as an entrepreneur, manager or cost account accountant, you should understand your business and the market you are operating in. Some new products are rather introduced with a high price, and then as it goes through the product life cycle the price begins to drop. Some of these products could include cars, mobile devices and some luxury items. And in terms of services, customer behaviors should be studied when making decision about fixing prices. Some services would be term poor if low prices are fixed on them, while the setting high prices for some services, will be seen as being overpriced.