penetration pricing harvard business review

#Penetration pricing harvard business review plus

The product's contribution to total firm profit (i.e. Main article: Contribution margin-based pricingĬontribution margin-based pricing maximizes the profit derived from an individual product, based on the difference between the product's price and variable costs (the product's contribution margin per unit), and on one's assumptions regarding the relationship between the product's price and the number of units that can be sold at that price. Fixed/ Variable Costs, Direct/ Indirect Costs, Employee Salary, Utility Costs, and other types of costs can be calculated by applying the Absorption Pricing Method.Ĭontribution margin-based pricing The absorption pricing can be calculated via '(Unit Variable Costs + (Overhead + Managing Costs))/ Amount of units produced.

#Penetration pricing harvard business review plus

The price of the product includes the variable cost of each item plus a proportionate amount of the fixed costs. Method of pricing in which all costs are recovered. Pricing strategies can bring both competitive advantages and disadvantages to its firm and often dictate the success or failure of a business thus, it is crucial to choose the right strategy.

It can also be used to defend an existing market from new entrants, to increase market share within a market or to enter a new market. The price can be set to maximize profitability for each unit sold or from the market overall. Pricing strategies determine the price companies set for their products. Pricing strategies and tactics vary from company to company, and also differ across countries, cultures, industries and over time, with the maturing of industries and markets and changes in wider economic conditions. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Louis, Missouri, drawing by Marguerite Martyn, 1912Ī business can use a variety of pricing strategies when selling a product or service. Another potential disadvantage is that the low-profit margins may not be sustainable long enough for the strategy to be effective.Approach to selling a product or service Sales being made at Soulard Market, St. Both can make it difficult to raise prices later. The main disadvantage of penetration pricing is that it establishes long-term price expectations for the product and image preconceptions for the brand and company. It can generate high stock turnover throughout the distribution channel, which creates important enthusiasm and support in the channel.It discourages the entry of competitors.It establishes cost-control and cost-reduction pressures from the start, leading to greater efficiency.It can create goodwill among the Innovators and Early Adopters, which can generate more demand via word of mouth.The strategy can achieve high market penetration rates quickly, taking competitors by surprise and not giving them time to react. It can result in fast diffusion and adoption across the product life cycle.The advantages of penetration pricing to the firm are the following:

Like skim pricing, penetration pricing shows an awareness of the dynamics in the product life cycle. Why Might Penetration Pricing Make Sense? Penetration pricing offers a lower price in order to draw in higher demand from consumers. If the initial price is set low, at $2, for instance, the quantity demanded will be high: 400 units. Returning to our economic model, below, you can see that penetration pricing focuses at the bottom of the demand curve.

Penetration pricing is most commonly associated with marketing objectives of enlarging market share and exploiting economies of scale or experience. The strategy works on the assumption that customers will switch to the new product because of the lower price. Penetration pricing is a pricing strategy in which the price of a product is initially set low to rapidly reach a wide fraction of the market and initiate word of mouth. 206 Reading: Penetration Pricing What Is Penetration Pricing?