You should also know how much money you hope to make. Another potential disadvantage is that the low-profit margins may not be sustainable long enough for the strategy to be effective. So if your COGS is £15.50 then the calculation is: £15.50 / (1 - 0.3) £22.14 (you might choose to price your products at £21.99) When choosing your mark-up, you should take fixed costs like rent and other overheads into account. 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.Since many customers are interested in low-price offers, sales volume can greatly increase. The strategy can achieve high market penetration rates quickly, taking competitors by surprise and not giving them time to react. There are several advantages of using a penetration pricing strategy that make it highly effective for brands that launch new products and want to win a market share. 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?
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