pricing strategies in Managerial economics

2. Introduction:
• Penetration pricing is a pricing strategy that is
used to quickly gain market share by setting an
initially low price to entice customers to
purchase from the company.
• Such pricing strategy is generally used by new
entrants into a market. An extreme form of
penetration pricing is called predatory pricing.

3. Rational behind Penetration
Pricing
• It is common for a new entrant to use a
penetration pricing strategy to compete
effectively in the marketplace.
• Price is one of the easiest ways to differentiate
new entrants among existing market players.

4. The main goal of the pricing
Strategy is to:
• Capture market share
• Create brand loyalty
• Switch customers from competitors
• Generate significant demand and
utilize economies of scale
• Drive competitors out of the market

5. Situation where Penetration Pricing
working effectively :
• When there is little product differentiation
• Demand is price-elastic
• Where the product is suitable for a mass
market (utilizing economies of scale)

6. Illustration and Example of
Penetration Pricing:
• A current small-sized player in the marketplace
that sells Notebook at Rs.10. Company A is an
international company with a large amount of
excess production capacity and is, therefore,
able to produce Notebooks at a significantly
lower cost. Company A decides to enter the
market, employ a penetration pricing strategy,
and sell notebook at a sale price of Rs.5.50.
The company’s cost to produce a notebook is
Rs.5.

7. 10
5.50 5

8. • With a marginal cost of Rs.5 and a sale price of
Rs.5.50, Company A is making nominal profits
per sale. However, the company is comfortable
with this decision as their overarching goal is to
switch customers over, capture as much market
share as possible, and utilize economies of
scale with their high production capacity.

9. Advantages of Penetration Pricing:
• High adoption and diffusion: Penetration pricing
allows a product or service to be quickly accepted
and adopted by customers.
• Economies of scale: The pricing strategy
generates high sales quantity that allows a firm to
realize economies of scale and lower marginal
cost.

10. • Marketplace dominance: Competitors are
typically caught off guard in a penetration
pricing strategy and are afforded little time to
react. The company is able to utilize the
opportunity to switch over as many customers
as possible.
• High turnover: Penetration pricing results in an
increased turnover rate, making vertical supply
chain partners, such as retailers and
distributors, happy.

11. • Increased goodwill: Customers that are able
to find a bargain in a product or service are
likely to return to the firm in the future. In
addition, the increased goodwill creates positive
word of mouth.

12. Disadvantages of Penetration Pricing:
• Pricing expectation: When a firm uses a
penetration pricing strategy, customers often
expect permanently low prices. If prices
gradually increase, customers will become
dissatisfied and may stop purchasing the
product or service.

13. • Low customer loyalty: Penetration pricing
typically attracts bargain hunters or those with
low customer loyalty. Said customers are likely
to switch to competitors if they find a better
deal.
• Damage brand image: It may affect the brand
image and cause customers to perceive the
brand as cheap.

14. • Damage brand image: It may affect the brand
image and cause customers to perceive the
brand as cheap.
• Price war among competitors: It results in
retaliation from competitors trying to maintain
their market share. Pricing war may decrease
profitability for the overall market.

15. • Inefficient long-term strategy: It is not a
viable long-term pricing strategy. In many
cases, firms that use the strategy face a loss of
profits. In this case, the firm may not be able to
recover its cost if it uses penetration pricing
over an extended timeframe.

16. References:
1.Managerial Economics, principles and
worldwide applications, eighth edition(2019) ,
Dominick salvatore, siddhartha K.Rastogi.
2.Various Online sources.