Question

What are the risks and benefits of implementing a penetration pricing policy as compared to a competitive pricing policy?

Answer 1

Answer:

Penetration pricing is a pricing strategy where a company charges less than its competitors in order to entice its competitors' customers to patronise them instead.

Competitive pricing on the other hand will see a company charging the same price as its competitors.

Benefits of using Penetration pricing over Competitive

• Reduce competition - If the company engaging in penetration pricing is large enough with more influence in the market, charging less than competitors might lead to competitors leaving the market as the prices will be too meagre for them to cover costs.
• Market Dominance - using penetration pricing can lead to customers moving from the competitors to the company using penetration pricing thereby giving that company market dominance.
• Economies of scale - Penetration pricing allows the company to sell more quantity of its product which means that it will have to produce more and this will reduce average costs for the company.

Risks involved

• Price War - There is a risk of a price war if a company uses penetration pricing. A price war happens when a company reduces its prices and their competitors react by reducing their own prices as well. It might led to a situation where this continues until all the companies are making significant losses.
• Brand Image damage - Cheaper products are usually perceived as having lower quality. Reducing prices might see customers believing instead that the brand is poor and so they may avoid it.
• Attracts low loyalty - The customers gained through this strategies most often have little brand loyalty and when a better deal comes than the one they are being offered in that moment, they will leave.