Key disadvantages of Penetration pricing strategy for a wholesale business

Penetration pricing is a strategy that a wholesale business </a implements when it introduces new products in an already overflowing sector at a comparatively lower price. Some wholesale traders forgo present-day profits in return for a good market share in future. According to experts, it can bring new customers into your store, increase your customer base and build customer loyalty. However, if implemented incorrectly, it can make you lose money and may also increase your competition in the market rather than decrease it.
Don’t forget that penetration strategy works best when the Wholesale Products are in high demand. Therefore, before implementing this strategy, check the demand before you consider cost/profit objective, estimate product’s lifecycle, or look for customers while keeping an eye out for your competition. Otherwise, things can go wrong. Let’s discover how it can wreck a wholesale business, if implemented in a wrong way.
Disadvantages of penetration strategy
The strategy is more often used when wholesalers and businesses, wishing to explore new market, see the potential of their wholesale products or want to build a large market share. Demand of a product plays the most significant role here. For instance, customers will relatively care less, if you have launched a low priced doorknob as compared to low priced computer accessories or everyday use items.
1. At the initial stage, a company has to forgo short term profit in hope to recollect profit after gaining a larger market share. Low pricing reduces the chances to earn good revenue. Furthermore, if the consumers reject product for any reason, the company may have to kiss the industry goodbye. The company may have to bear irrecoverable loss in the form of no revenue and no market share gain.
2. Let’s assume that customers accept your product at a given price. However, this extremely low pricing structure can bring hurdle for you in the long run. Introductory prices are low but it becomes difficult to attain the same position in the market when you increase the price. Though the price increase is inevitable with the passage of time but seeing the hike, people may get back to their previous choice.
3. Don’t forget that by lowering the price, you are serving the customers looking for cheap deals. It shows you may be missing your target customers and it is certainly not good for any new entrant looking to establish its market and win market share. You can say that penetration strategy helps to win false loyalty.
4. You cannot implement this pricing strategy if you deal in a particular niche or luxury products. It is because whenever customers buy such products, they do not look at price but give prime importance to the premium quality of products. All around the world, people associate premium quality products with high prices. Therefore, be very careful before implementing this pricing strategy if you are planning to implement it on luxury products, high-end automobiles, expensive gadgets and accessories.
5. Penetration pricing strategy can go horribly wrong for your business if competitors also decide to further lower down their product prices. It can simply start a price war and gradually, all the competitors of this sector will get involved in this price war and resultantly, it will be dangerous for all.
These are a few disadvantages associated with this pricing strategy. It may stray you on to unethical territories just to knock out competitor from the sector so be very careful while implementing this pricing strategy for your offers.