A penetration pricing policy is used to stimulate market and sales growth by deliberately offerings products at low prices. Penetration pricing most often is used to acquire and hold share of market as a competitive maneuver. However, in country markets experiencing rapid and sustained economic growth, and where large shares of the population are moving into middle income classes, penetration pricing may be used to simulate market growth even to minimize competition. Penetration pricing may be a more profitable strategy than skimming if it maximizes revenues as a base fighting the companies that is sure to come.
Regardless of the formal pricing policies and strategies a company uses, it must be remembered that the markets set the effective price for a product. Said another way, the price has to be set at a point at which the consumer will perceive value received and the price must be within reach of the target market. As a consequence many products are sold in very small units in some markets in order to bring the unit price within reach of the target market. Warner Lambert’s launch of its five unit pack of Bubbaloo bubble gum in Brazil failed – even though bubble gum represents over 72 percent of the overall gum sector — because it was priced above the target market. A re-launch of a single unit pillow pack brought the price within range and enabled.
As a country’s economy grows and distribution of wealth becomes more equitable multiple income levels develop, distinct market segments emerge and multiple price levels and price / quality perceptions will increase in importance. As an example, the market for electronic consumer goods in China changed in just a few years . Instead of a market for imported high priced and high quality electronic goods aimed at the new rich and cheaper poorer quality . Chinese made goods for the market, multitiered market reflecting the growth of personal income has merged.
Sony of Japan the leading foreign seller of the high priced consumer electronics goods, was upstaged in the Chinese market when Aiwa, its competitor recognized the emergence of a new middle tier market for good quality modestly priced electronic goods. As part of a global strategy focused on slim margins and high turnover, Aiwa of Korea began selling hi-fi systems at prices closer to Chinese brands than to Sony’s. Aiwa’s product quality was not far behind than that of Sony and was better than top Chinese brands and the product resembled Sony’s high end systems. Aiwa’s recognition of a new market segment and its ability to tap into it resulted in a huge increase in overall demand for Aiwa products.
Pricing decisions that were appropriate when companies directed their marketing efforts towards single market segments will give way to more sophisticated practices. As incomes rise in many foreign markets the pricing environment a company encounters will be similar to that in the United States. As countries prosper and incomes become more equitably distributed, multiple market segments develop. As these segments emerge, Wal-Mart, Carrefour and other mass retailers enter the market to offer price conscious customers good value at affordable prices. This scenario seems to repeat itself in country after country. Within these markets an effective pricing strategy becomes crucial.
People traveling abroad often are surprised to find goods that are relatively inexpensive in their home country are priced outrageously high in other countries. Because of the natural tendency to assume that such prices are a result of profiteering ,manufactures often resolve to begin exporting to crack these new, profitable foreign markets only to find that, in most cases the higher reflect the higher cost of exporting.
Source: International Marketing