Penetration pricing is a marketing strategy that is used by companies to attract customers to a new service or product line. It entails charging a low price for a new product that has been introduced to the market in an effort to attract customers from existing firms in the product or service niche. It is based on the idea that offering a low price will not only make consumers aware of the existence of the product or service but also convince them to try out the new product or service. In the process, the firm is able to maximize sales, capture market share rapidly and gain widespread acceptance.
Hub and Spoke Airline can apply penetration pricing to attract customers from existing airlines that are already plying the route. Since, it is new in the route it has to stand out to make its existence known by travellers. Penetration pricing is appropriate in the airline industry because they incur high fixed overhead costs per flight with very minimal direct variable costs. The costs incurred by a flight that is half full is almost the same as one that is filled to capacity. Therefore, measures that ensure that the flight is filled to capacity will maximize the profits generated by the airline. By offering a low introductory price, Hub and Spoke will ensure that its flights are full thus maximizing not only revenues but profit margins as well.
The downside of penetration pricing is that it may not lead to profits if the prices are too low. Hub and Spoke Airline is also small airline. Therefore, it may not be in a position to offer low prices relative to its competitors with large network carriers that enjoy bigger economies of scale. Lastly, if prices are raised after the introductory period customers may move away unless the airline offers something extra or unique compared to its competitors.
References
Ferrell, O., & Hartline, M. (2010). Marketing Strategy. London: Cengage Learning.
