Walmart - Market Penetration Pricing
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Market Penetration Pricing A strategy adopted for quickly achieving a high volume of sales and deep market penetration of a new product. Under this approach, a product is widely promoted and its introductory price is kept comparatively low. This strategy is based on the assumption that (1) The product does not have an identifiable price-market segment, (2) It has elasticity of demand (buyers are price sensitive), (3) The market is large enough to sustain relatively low profit margins, and (4) The competitors too will soon lower their prices.
The advantages of penetration pricing to the firm are:
It can result in fast diffusion and adoption. This can achieve high market penetration rates quickly. This can take the competitors by surprise, not giving them time to react. It can create goodwill among the early adopters segment. This can create more trade through word of mouth. It creates cost control and cost reduction pressures from the start, leading to greater efficiency. It discourages the entry of competitors. Low prices act as a barrier to entry (see Porter's 5forces analysis). It can create high stock turnover throughout the distribution channel. This can create critically important enthusiasm and support in the channel. It can be based on marginal cost pricing, which is economically efficient.
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. This makes it difficult to eventually raise prices. Another potential disadvantage is that the low profit margins may not be sustainable long enough for the strategy to be effective. Price penetration is most appropriate where:
Product demand is highly price elastic. Substantial economies of scale are available.
The product is suitable for a mass market (i.e. enough demand). The product will face stiff competition soon after introduction. There is not enough demand amongst consumers to make price skimming work. In industries where standardization is important. The product that achieves high market penetration often becomes the industry standard (e.g. Microsoft Windows) and other products, whatever their merits, become marginalized. Standards carry heavy momentum.
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. Examples: Penetration pricing is a common strategy often used for new company or product launches. The intent is to attract customers and generate increased sales volumes by establishing a relatively low price point for the industry or product. While this approach can lead to a price-oriented customer base, it has been used effectively by companies to enter the market. Lay's Stax Frito-Lay launched its Lay's Stax brand of potato chips in August 2003. This particular chip was intended to compete directly for business from fans of the popular Pringles brand chips. The curved shape and texture of the chip were virtually the same. The tall, cylinder-shaped canister was nearly identical, too. During the first few months of the product launch, cans of Stax were available for $0.69 in grocery stores. After the initial penetration strategy to draw customers, the common supermarket price rose above $1. A similar approach of offering low price points and working with retailers to get prominent display positions can help local manufacturers and distributors attract interest from local buyers. Netflix Online, mail-order and streaming movie rental company Netflix launched in 1997. The initial service packages included one-, two- or three-at-a-time DVD rental plans with tiered price points. The initial price of the company's "best value," the three-at-a-time package was $14.99. For customers who turned around at least three movies each week, this amounted to a little over $1 per DVD during the month. The purpose of the price at that time was to attract customers away from Blockbuster. The pricing strategy, combined with first-mover advantages in mail order and streaming technology helped Netflix pull in subscribers, which contributed to Blockbuster's demise. A small company with an innovative offering can learn from the initiative shown by Netflix. By using low initial price points to build a massive customer base before larger competitors enter the market, you have a sustainable competitive advantage. Hospitality As an industry, hospitality has been ripe with penetration pricing. Virtually every airline has used this strategy at one point or another to attract customers or to remain competitive. The excessive use of price-driven marketing has contributed to the large number of unprofitable and failed airlines in the
late 20th to early 21st centuries. Similarly, hotels constantly use discount rates and promotions. Econo Lodge, Super 8 and Motel 6 are examples of hotels and motels that perpetually use penetration pricing to compete against larger scale operations. Small companies may find limited success using penetration pricing in markets already ripe with low-cost providers. Small businesses often have greater advantages in customized services and specialized products. Wal-Mart In many industries, one company enters the market with a penetration pricing strategy and is able to maintain a low price approach over the long term. No company better illustrates this than retail discount giant Wal-Mart. The company promotes itself with an "Always the low prices" mantra and has been the target of criticism because of its ability to enter small communities, attract customers from local businesses and eliminate competition. As a long-term strategy, penetration pricing requires the company to maintain low-cost operations, including inventory costs, labor, supply chains, and operations. Again, penetration pricing may not work as a long-term play for a small business, unless you have unique access to low-cost suppliers and run highly efficient operations.
Walmart: Discount stores such as Wal-Mart use penetration pricing in two ways. First, they offer new products through their stores at prices much lower than other stores, hoping that you will buy more than that one product once you come in the store. They are willing to lose money on the new product as a way to get more customers through the door. Also, they use penetration pricing in new geographic markets by underselling their more wellestablished competitors. Once they have a loyal customer base, they can begin to gradually increase prices.
The advantages of penetration pricing to the firm are:
It can result in fast diffusion and adoption. This can achieve high market penetration rates quickly. This can take the competitors by surprise, not giving them time to react. It can create goodwill among the early adopters segment. This can create more trade through word of mouth. It creates cost control and cost reduction pressures from the start, leading to greater efficiency. It discourages the entry of competitors. Low prices act as a barrier to entry (see Porter's 5forces analysis). It can create high stock turnover throughout the distribution channel. This can create critically important enthusiasm and support in the channel. It can be based on marginal cost pricing, which is economically efficient.
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. This makes it difficult to eventually raise prices. Another potential disadvantage is that the low profit margins may not be sustainable long enough for the strategy to be effective. Price penetration is most appropriate where:
Product demand is highly price elastic. Substantial economies of scale are available.
The product is suitable for a mass market (i.e. enough demand). The product will face stiff competition soon after introduction. There is not enough demand amongst consumers to make price skimming work. In industries where standardization is important. The product that achieves high market penetration often becomes the industry standard (e.g. Microsoft Windows) and other products, whatever their merits, become marginalized. Standards carry heavy momentum.
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. Examples: Penetration pricing is a common strategy often used for new company or product launches. The intent is to attract customers and generate increased sales volumes by establishing a relatively low price point for the industry or product. While this approach can lead to a price-oriented customer base, it has been used effectively by companies to enter the market. Lay's Stax Frito-Lay launched its Lay's Stax brand of potato chips in August 2003. This particular chip was intended to compete directly for business from fans of the popular Pringles brand chips. The curved shape and texture of the chip were virtually the same. The tall, cylinder-shaped canister was nearly identical, too. During the first few months of the product launch, cans of Stax were available for $0.69 in grocery stores. After the initial penetration strategy to draw customers, the common supermarket price rose above $1. A similar approach of offering low price points and working with retailers to get prominent display positions can help local manufacturers and distributors attract interest from local buyers. Netflix Online, mail-order and streaming movie rental company Netflix launched in 1997. The initial service packages included one-, two- or three-at-a-time DVD rental plans with tiered price points. The initial price of the company's "best value," the three-at-a-time package was $14.99. For customers who turned around at least three movies each week, this amounted to a little over $1 per DVD during the month. The purpose of the price at that time was to attract customers away from Blockbuster. The pricing strategy, combined with first-mover advantages in mail order and streaming technology helped Netflix pull in subscribers, which contributed to Blockbuster's demise. A small company with an innovative offering can learn from the initiative shown by Netflix. By using low initial price points to build a massive customer base before larger competitors enter the market, you have a sustainable competitive advantage. Hospitality As an industry, hospitality has been ripe with penetration pricing. Virtually every airline has used this strategy at one point or another to attract customers or to remain competitive. The excessive use of price-driven marketing has contributed to the large number of unprofitable and failed airlines in the
late 20th to early 21st centuries. Similarly, hotels constantly use discount rates and promotions. Econo Lodge, Super 8 and Motel 6 are examples of hotels and motels that perpetually use penetration pricing to compete against larger scale operations. Small companies may find limited success using penetration pricing in markets already ripe with low-cost providers. Small businesses often have greater advantages in customized services and specialized products. Wal-Mart In many industries, one company enters the market with a penetration pricing strategy and is able to maintain a low price approach over the long term. No company better illustrates this than retail discount giant Wal-Mart. The company promotes itself with an "Always the low prices" mantra and has been the target of criticism because of its ability to enter small communities, attract customers from local businesses and eliminate competition. As a long-term strategy, penetration pricing requires the company to maintain low-cost operations, including inventory costs, labor, supply chains, and operations. Again, penetration pricing may not work as a long-term play for a small business, unless you have unique access to low-cost suppliers and run highly efficient operations.
Walmart: Discount stores such as Wal-Mart use penetration pricing in two ways. First, they offer new products through their stores at prices much lower than other stores, hoping that you will buy more than that one product once you come in the store. They are willing to lose money on the new product as a way to get more customers through the door. Also, they use penetration pricing in new geographic markets by underselling their more wellestablished competitors. Once they have a loyal customer base, they can begin to gradually increase prices.
