There are numerous pricing strategy that has been developed by creative brains at different companies but some are known more than others and are also taught at different levels to the students of accounting, business, marking and management. Two of them are penetration pricing strategy and loss leader pricing strategy. Although the apparent application looks the same but the motives are clearly different in both the strategies which actually distinguish them from each other.
Penetration pricing strategy is a pricing technique in which the products are priced relatively lower then the price at which similar products of competitors are being sold in the market. If we keep things simpler then following such pricing strategy, customers will be “pulled” from the products already available in the market and thus market share will be gained for the product launched.
In simple words the ultimate purpose is to gain a satisfactory market share for the product at hand i.e. the same product which has been introduced with lower market price.This strategy is applied in the cases where products are substitutes of each other i.e. can replace each other and can be used almost alternatively e.g.
For example, Nokia wants to introduce its cellular phones in a particular country where Apple’s iphone holds a significant market share then Nokia will introduce its high end cell phones at a price lower than the market price of iphone and thus offering better cost-benefit opportunity to the customers. And if customers finds it better then Nokia’s products will start gaining market share just because customer is getting satisfactory benefits against competitive price which in the perception of customer is giving better cost-benefit ratio.
Loss leader pricing strategy is a pricing technique in which the products are priced low to escalate the sale (revenue/profit) of other goods offered by the same entity.
In simple words the prices on few of the products are lowered to increase the sales or capture the market share for other products indirectly where increase in sale or market share for the main product (product actually offered at lower price) may not be intended. This strategy is mostly applied in the situation where products are complements in nature i.e. you have to have complete set of products to make the unit work e.g. printers and print cartridges, camera and lens, razors and blades, gaming consoles and game discs etc.
For example, HP may sell printing machines free of cost. Seeing this offer everybody will rush to the markets and get the machine. But in order to make printing machine work, customers need to buy cartridges which are sold separately at such higher prices that even compensates for the loss of selling printing machines for free. Same is applied in case of camera manufacturers where camera base is sold for a price that is really affordable. But to make it work you need to buy camera lenses which are sold separately at a higher price. This strategy is also used on frequent basis by large retail chains that put items on discounts and thus pulling customers where they will buy other products as well e.g. eggs are offered at very attractive price and when customers will come to buy eggs they will buy things like bread, milk and other kitchen items thus boosting overall sales.
In both of the situations we observed that prices are lowered but the motives behind lowering the price are very much different. Differences are also summarized below for even better understanding the difference between penetration pricing and loss leader pricing technique.
Penetration strategy | Loss leader strategy |
Price of that product is reduced for which gain in market share is intended | Usually the product offered at a discount for which increase in market share may or may not be intended but discount offer on such product will attract customers and cause sale increase in other products |
Loss or reduced profits at the start is compensated by increasing the price after the satisfactory market share is gained | Loss or reduced profits of one product are compensated by selling other products which are offered at high profit margins. |
the target good is competitor’s products for which market over run is intended or in other words penetration is used to overthrow the competition and after competition is subsided prices are increased. | the target goods are other variety of goods from the same entity and one product is sacrificed to increase the sales of other products produced/offered by the same entity |
The product offered at a discount itself is usually a stand alone product | The product offered at a discount is usually a complementary product and thus requires other parts to function properly where these other parts are not included in a discount offer. |
Prices are reduced in relation to the prices of competitor’s goods | Discounts are offered by keeping the “popularity” factor in mind i.e. a discount offer which attracts more customers usually with no relation to competitor’s products. |