Limitations of Market Penetration Pricing

Limitations of Market Penetration Pricing

Penetration pricing strategy to get high market share by reducing price does not hold true in all circumstances. There are some limitations of this strategy i.e. high competition in the market, high growth opportunities, quality of product, and brand role.

1.    Competitor Will React

Penetration pricing strategy does not work in competitive market, because in high competitive market, competitor will react immediately, and thus desired market share cannot be attain by redacting prices.

2.    Growth Encourages Entry

Penetration strategy cannot stop the new entry in the market, because growth opportunities will encourage people to invest in the industry to get their share out of growing market. Therefore penetration strategy will not prevent new entry in markets which have high growth potentials or expectations.

3.    Quality Does Matter

Price is not the sole factor for capturing the market share. Quality of product is also an important factor, and people are ready to pay high price for improved quality.Therefore improved quality at lower price is the best strategy to capture the market share, instead of just focusing on price reduction.

4.    Brand Name Play Role

It is not easy to compete with the good brand by lowering the price. People are ready to pay more for brand reputation. competing with a reputable brand by lowering prices is not a suggested option.

Disadvantages of Market Penetration Pricing

Disadvantages of market penetration Pricing Strategy

1.    High growing market

This strategy will not work in high growing market and competitor will react accordingly. The new entry cannot be avoided with low prices if the market has a lot of growth opportunity for example the telecom sector almost in every country of the world four to five companies can get their share even by offering higher prices than competitors.

2.    Price is only one factor

The price is only one of the factors for capturing the market. There are also other factors for example a brand name if branded competitor enter in the market even with the high price there is fair chance that he will lead the market. The other factor is product quality and features for example if your competitor enters in the market with improved product with same price or relatively high price then competitor will get his share from the market.

3.    Low price may result in high loses

The lower prices are possible by keeping the profit margin low. This situation may result in heavy losses if there is fall in demand. The profit margin should be sufficient enough to cover the fixed cost as well. Some company’s takes into account only the marginal cost for pricing decision and this situation may lead for heavy losses if the due consideration is not given to fixed cost.

Advantages of Market Penetration Pricing Strategy

Advantages of Market Penetration Pricing Strategy

There are number of advantages associated with market penetration strategy. These advantages has been briefly explained below

1.    High Market Share

Main advantage of keeping the prices low is to attain high market share. People are psychologically attracted to buy the product. This strategy is very effective for launching of new product.

2.    Discourages Competition

Other advantages of market penetration pricing are to discourage the new entry in the market. Businessman loves to enjoy competition free market, because there are number of advantages are associated with competition free market.

3.    High profit are possible

Market penetration can get high profit due to establish relationship between volume of sales and profitability. We know that profitability rises with rise in volume of sales.

4.    Reduces stock obsoletes

High sales volume in market penetration pricing strategy reduces the chances of stock obsoletes. Stock obsoletes are critical for some industries like fashion industry.

5.    Customer Loyalty

Low prices can be a source of wining the customer loyalties. This can be easily done by offering quality product at lower prices.

6.    Future product Launch

High market share by reducing prices can be helpful for launching the future products. People knowledge about the reputation of the entity plays important role in introducing new products.

7.    Cost control is focused

Low price means low unit profit, and therefore management try to keep the cost under control, otherwise cost may jump higher than selling price, and such situation can bring disaster results for organization.