This can be illustrated graphically in two separate stages.įirst, the initial decrease in price leads to a short-term loss of economic surplus but an increase in demand. This demonstrates that in the long run penetration pricing transforms elastic demand into inelastic due to acquired consumers’ loyalty. Consumers gradually become loyal to the company due to this lower price, and since the demand becomes almost inelastic in the long term, the firm can thus increase its profits by raising the price afterwards (for a more detailed explanation, see our article on price elasticity of demand). As a result, a firm accepts a loss of surplus during the first stages of implementing its penetration pricing strategy because it must sell at a lower price in order to capture additional market share. Penetration pricing relies on one main assumption: if the consumer becomes loyal to a firm, the demand consequently becomes less elastic over time. On the other hand, lowering one’s prices in an elastic market can potentially be efficient if the increase in demand compensate for the loss in the price. If the demand is very elastic, penetration pricing results in a high level of demand when prices are low, but this high level of demand drops significantly when the company decides to raise its prices. The effectiveness of using a penetration pricing strategy is strongly linked to the price elasticity of demand. In addition, with price skimming, a company is looking to maximize its long-term profit by acquiring as much consumer surplus as possible by setting a relatively high price in the beginning and lowering it over time. With penetration pricing, a company hopes to make its customers loyal by selling at a very low price in the beginning and increasing the price in some time. Although very different in nature, these two specific types of pricing seem to be the most efficient for new products according to Spann, Fischer and Tellis. Penetration pricing is often seen as a pricing method that is the opposite of price skimming. After this, the company raises the price again, hoping to capture the same level of customer demand as with its previous very low level of pricing. When using this method, a firm first sets its prices at a very low level (sometimes even with negative margin) in order to increase customer demand. Penetration pricing is a very aggressive type of pricing. Long-term maintenance agreement pricing.Continuous Ranked Probability Score (CRPS).Quantitative Principles for Supply Chain (Lecture 1.6).21st Century Trends in Supply Chain (Lecture 1.5).Programming Paradigms for Supply Chain (Lecture 1.4).Product-Oriented Delivery for Supply Chain (Lecture 1.3).The Quantitative Supply Chain in a Nutshell (Lecture 1.2).The Foundations of Supply Chain (Lecture 1.1).

Penetration vs skimming price