in this video we're going to talk about
penetration pricing will start with a
quick definition explaining what
penetration pricing is will walk through
how it's incorporated in the market and
then we'll provide some examples to give
you a little bit of a better
understanding of how penetration pricing
is incorporated in the market today so
for starters let's talk about what
penetration pricing is penetration
pricing is a pricing strategy that
involves setting a relatively low price
initially for the purpose of increasing
market share and then what happens is we
gradually increase prices over a period
of time so that we are profitable so
this can be used in a number of
different circumstances but the
commonality is that we're trying to gain
market share and we're using price as
the incentive for people to adopt and
purchase our product or service so let's
see how this works in comparison to the
prior video where we talked about price
skimming so penetration pricing again is
a little bit of a different strategy
so instead of starting with a high price
we're actually going to start with a low
price and so we're going to go ahead and
put price on the y-axis here and then
the quantity of goods demanded is going
to go over here on the x-axis and so
again very similar to pass we know that
as the price of a product decreases the
quantity demanded begins to increase
that's kind of the basic idea the law of
supply and demand so we're penetration
pricing is different is that instead of
pricing our product hi we're actually
going to start relatively low and then
we're going to gradually increase prices
Now price skimming which we talked about
in our prior video involves establishing
a higher price initially and then
gradually lowering it over a period of
time in order to skim different segments
of the market so that we can kind of
maintain profitability over a period of
time so that is generally how the idea
of it works is we're trying to expand
our market share and then we're
gradually going to increase prices over
a period of time
so let me give you a couple of examples
of companies that have utilized this to
some degree as you kind of see how this
plays out practically one of the more
common examples is really any kind of
internet phone provider television
provider everything from comcast xfinity
to AT&T u-verse utilizes some form of
penetration pricing and the reason that
that exists is generally because they
want to expand their user base by
offering that low introductory offer and
they generally have some kind of
contract that you sign in order to lock
in that rate for a period of time and
then once that kind of grace period ends
the contract for the offered price goes
up and and sometimes rather
significantly and that would be an
example of penetration pricing is trying
to offer a really low price to attract
consumers and then eventually increasing
prices and what you're hoping is that
the customers eventually just won't
switch and so when your comcast bill or
your TV bill goes up that the provider
is hoping that your that you don't exert
the effort to shop around to switch
services and that sort of thing and the
reason for that is usually the
introductory prices that are offered via
penetration pricing don't allow for a
great deal of profitability the margins
are generally very slim and so the
business needs to increase prices over a
period of time to be able to offer the
service profitably the other company
that I think of that utilizes this to an
extent or at least had in the past
southwest airlines and when they first
entering the market they offered a very
very low price point you purchase the
ticket that ticket did not guarantee you
an exact seat on the plane and just
guaranteed you a seat on the plane so it
was kind of a first-come first-serve it
was really a no-frills kind of airliner
but they got buy in the market because
no other airliner wanted to compete with
them nobody was willing to lower prices
that much you simply couldn't make any
money and so they were able to carve out
a little bit of a niche simply because
nobody wanted to lower their prices to
compete with them so they were allowed
to operate kind of unfettered for a
period of time
now we know that they still offer some
low prices but generally speaking they
have a little bit of a higher price
point compared to previously simply to
have some level of profitability
so again just summarizes we finish up
this video penetration pricing is all
about having a low price point so that
we can expand market share and then
gradually begin to increase prices over
a period of time