A Group Report On

MARKET PENETRATION PRICING

WALMART CASE STUDY

Submitted By: SYNDICATE-2 Bhawana Malhotra Harshal Bhoyar Ranjeet Chavan Chethana Raveendran Deepak Sharma Dev Dhruwa Prakash Shailendra Shankar 11020541087 11020541088 11020541089 11020541090 11020541091 11020541092 11020541148

Managerial Economics September 8, 2011

MARKET PENETRATION PRICING Penetration pricing is a strategy employed by businesses introducing new goods or services into the marketplace. With this policy, the initial price of the good or service is set relatively low in hopes of "penetrating" into the marketplace quickly and securing significant market share. "This pricing approach often is used for products that are of good quality, but do not stand out as vastly better than competing products. wrote Ronald W.Hilton in Managerial Accounting. Writing in Basic Marketing, E. Jerome McCarthy and William Perreault Jr. observed that "a penetration pricing policy tries to sell the whole market at one low price. Such an approach might be wise when the 'elite' marketthose willing to pay a high priceis small. This is the case when the whole demand curve [for the product] is fairly elastic. A penetration policy is even more attractive if selling larger quantities results in lower costs because of economies of scale. Penetration pricing may be wise if the firm expects strong competition very soon after introduction. A low penetration price may be called a 'stay out' price. It discourages competitors from entering the market." Once the product has secured a desired market share, its producers can then review business conditions and decide whether to gradually increase the price or not. Penetration pricing isnt purely for new market entrants, established companies may bring out new brands or variants and use penetration pricing on them. E.g. a washing Detergent maker may have a product which has a new formula. Penetration pricing may be used to encourage people to try the new version. This is a reason why a product or service is worth giving a try when you havent before or have moved away from it; plus a low price can be a winning combination.. Advantages 1. In markets with multiple sales or high repeat business, penetration pricing creates an advantage for firms that can sell products at lower prices than the competition. 2. Having high initial sales usually results in a lower per-unit cost, allowing an acceptable profit margin while keeping competition at bay. 3. It creates goodwill for the company if customers perceive that they are purchasing a high-quality product at a fair price. Disadvantages 1. If sales fall short of projected goals, the company could end up with a large inventory and higher-than-expected costs. 2. Additionally, sales could suffer if customers perceive the product as too cheap, and the quality brand image could be damaged. 3. Brands that are perceived as "cheap" may have trouble competing with higher-priced competition. 4. Another significant risk is that the competition will follow suit, lowering its own prices and creating a price war.

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Managerial Economics September 8, 2011

Price Penetration is most appropriate where:

1. 2. 3. 4. 5. 6.

Product demand is highly price elastic. Substantial economies of scale are available. The product is suitable for a mass market (i.e. enough demand). The product will face stiff competition soon after introduction. There is not enough demand amongst consumers to make price skimming work. In industries where standardization is important. The product that achieves high market penetration often becomes the industry standard (e.g. Microsoft Windows) and other products, whatever their merits, become marginalized. Standards carry heavy momentum.

WALMART CASE An analysis of Walmart's "everyday low price" strategy reveals that its mega success cannot be contributed all to its surface competence. Walmart's market dominance has given itself considerable bargaining power against suppliers. However, Walmart also has the most advanced cost control and logistic systems in the industry. Combined with strict implementation of such advanced systems, Walmart has gained its core competence that is second to none in the industry. It is this endogenous competitiveness that explains much of Walmart's non-stop growth. It is agreed that technological advances has played an important role in the rise of Walmart. However, the driving force behind Walmart's rise lies in its "customer expectation management". Through strict implementation of cost control and standardization of internal management, Walmart has been able to offer relatively high-quality products and excellent customer service to consumers at very reasonable prices, often exceeding their expectations. In fact, Walmart has been so obsessed with cost cutting and service enhancement that it broadcasts every new cost-cutting idea on its own satellite communication system and on its internal publications and the company is generous in rewarding those who come up with new savings ideas that are proven effective (either through cash rewards or stock/stock option issuance.) Walmart is an organization that has the capability to evolve itself. The unprecedented growth of WalMart testifies to the core competence of the company. Its enormous size can only work to its advantage as long as the company still has the ability to evolve around the same core concept.

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Managerial Economics September 8, 2011

Each week, about 100 million customers, nearly one-third of the U.S. population, visit Walmart's U.S. stores. Walmart customers give low prices as the most important reason for shopping there, reflecting the "Low prices, always" advertising slogan that WalMart used from 1962 until 2006. With the understanding that customers liked the fact that Walmart offers low prices and makes me feel like a smart shopper above all, the creative team began developing a series of taglines for the campaign. Ultimately, On September 12, 2007, Walmart introduced new advertising with the slogan, "Save Money Live Better," replacing the "Low prices, always", which it had used for the previous 19 years. Walmart chose Save Money. Live Better, based on a quote from Sam Walton: If we work together well give the world an opportunity to see what its like to save and have a better life.

The Save Money. Live Better campaign included print, circular, radio, online, in-store and TV advertising. It became a part of all of the retailers multicultural marketing efforts. Global Insight, which conducted the research that supported the ads, found that Walmart's price level reduction resulted in savings for consumers of $287 billion in 2006, which equated to $957 per person or $2,500 per household (up 7.3% from the 2004 savings estimate of $2,329). The Result Advertising research showed a significant year-over-year improvement in customer perception of the Walmart brand. The company looked to its own bottom line to monitor the success of the campaign, says Portilla. We use our own trackers to make sure our own sales end up being a validation of the work, he says. There was plenty of validation. Sales for the holidays were up 7%, while comparable store growth was up 2.5%. In contrast, comparable sales dipped at most major rivals. As Walmarts campaign shows, Smart Penetration can mean the difference between connecting with shoppers who rely on savings and losing ground to competitors.

Clearly, Walmart's competitive advantage is a direct result of its "everyday low price" strategy. Walmart, successfully carries out such a strategy by establishing a "low cost procurement-low cost distribution-low price sales" business process.

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