In most countries, predatory pricing is illegal, but it can be difficult to differentiate illegal predatory pricing from legal penetration pricing. Taken to the extreme, penetration pricing is known as predatory pricing, when a firm initially sells a product or service at unsustainably low prices to eliminate competition and establish a monopoly. Thus, the company makes more money from the cartridges than it does for the printer itself. It is an almost universal tactic in the desktop printer business, with printers selling in the US for as little as $100 including two ink cartridges (often half-full), which themselves cost around $30 each to replace. A starter product is sold at a very low price but requires more expensive replacements (such as refills) which are sold at a higher price. Standards carry heavy momentum.Ī variant of the price penetration strategy is the bait and hook model (also called the razor and blades business model). The product that achieves high market penetration often becomes the industry standard (such as Microsoft Windows) and other products, whatever their merits, become marginalized. In industries in which standardization is important.There is not enough demand amongst consumers to make price skimming work.The product will face stiff competition soon after introduction.The product is suitable for a mass market, with enough demand.Substantial economies of scale are available.Product demand is highly price elastic.Price penetration is most appropriate in these circumstances: That way, the perceived price points remain high even though the actual selling price is low.Īnother potential disadvantage is that the low profit margins may not be sustainable long enough for the strategy to be effective. A common solution to this problem is to set the initial price at the long-term market price, but include an initial discount coupon (see sales promotion). There is much controversy over whether it is better to raise prices gradually over a period of years (so that consumers do not notice), or employ a single large price increase. Some commentators claim that penetration pricing attracts only the switchers (bargain hunters) and that they will switch away as soon as the price rises. That makes it difficult to eventually raise prices. The main disadvantage with penetration pricing is that it establishes long-term price expectations for the product, and image preconceptions for the brand and company. It can be based on marginal cost pricing, which is economically efficient.It can create high stock turnover throughout the distribution channel, which can create critically important enthusiasm and support in the channel.Low prices act as a barrier to entry (see Porter's 5-forces analysis).
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