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Under what circumstances penetration pricing policy can be adopted?

Penetration pricing: This pricing policy is in favour of using a low price as the principal instrument for penetrating mass markets early. It is opposite to skimming pricing. The low pricing policy is introduced for the sake of long-term survival and profitability and hence it has to receive careful consideration before implementation. It needs an analysis of the scope for market expansion and hence considerable amount of research and forecasting are necessary before determining the price.

Penetration pricing means a price suitable for penetrating mass market as quickly as possible through lower price offers. This method is also used for pricing a new product. In order to popularize a new product penetrating pricing policy is used initially. The company may not earn profit by resorting to this policy during the initial stage. Later on, the price may be increased as and when the demand picks up. Penetrating pricing policy can also be adopted at any stage of the product life cycle for products whose market is approached with low initial price. The use of this policy by the existing concerns will discourage the new concerns to enter the market. This pricing policy is also known as “stay-out-pricing”. 

Circumstances for adoption:

The three circumstances in which penetrating pricing policy can be adopted are as under:
(i) When demand of the product is elastic to price. In other words, the demand of the product increases when price is low.
(ii) When there are substantial savings on large-scale production, here increase in demand is sustained by the adoption of low pricing policy.
(iii) When there is threat of competition. The prices fixed at a low level act as an entry barrier to the prospective competitions.
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