Does penetration pricing allow the company to break even through volume or large margin?
Penetration pricing is a pricing strategy in which a company initially sets a low price for its products or services in order to enter a market and gain market share. The goal of penetration pricing is not necessarily to break even through volume or large margin, but rather to attract customers and build customer loyalty.
To answer your question about breaking even, it is important to understand how a company can break even through volume or large margins.
1. Breaking even through volume: If a company has high fixed costs and low variable costs, it can break even by selling a large volume of products or services. In this case, even if the company has a low profit margin per unit sold, it can still achieve profitability by selling a large quantity of units.
2. Breaking even through large margins: Alternatively, a company may have lower sales volume but higher profit margins per unit. In this case, the company needs to sell fewer units at a higher price to achieve break-even point. This strategy is often used by luxury brands or companies with niche products that have higher production costs.
Now, let's relate this to penetration pricing. When a company uses penetration pricing, it aims to attract customers by offering a lower price compared to competitors. This lower price may result in lower profit margins on individual sales, which means breaking even through large margins is less likely.
Instead, the primary objective of penetration pricing is to gain market share and increase sales volume. By setting a lower price, the company aims to encourage customers to choose their product or service over competitors'. Eventually, the company hopes to build customer loyalty and capture a larger market share. Penetration pricing may result in lower initial profits, but the goal is to gain a larger customer base and potentially increase profits in the long run through repeat purchases and upselling.
In summary, penetration pricing is primarily focused on building market share and customer loyalty, rather than breaking even through volume or large margins.