Penetration pricing is a pricing strategy that’s used -as the name suggests- to penetrate a new market.
Getting a foothold in a new market is never easy. This is especially true if the service/product that you’re offering is not unique. People are already buying something else. Why should they give your product a shot
Your existing competitors have a big advantage: they have been there first. Trying to capture a market share from one of those well-established competitors requires a strong incentive to their customer. That’s where penetration pricing comes into play. Using this strategy, you give potential customers a reason to try your product over others that they already know and trust.
What is the meaning of penetration pricing? In layman term, this is a pricing strategy that is used by new product services to quickly capture a share of the market. By setting a low price for your products -compared to your competitors, you get people to try them. If they like your product, there is a chance they’ll become long-term customers. Despite sounding really simple, there is more to penetration pricing than meets the eye.
Set your goals before you start
Super-low prices aren’t something that most business can sustain forever. You have set a low penetration price and have captured a large market share because of your low prices. Now what?
The problem with penetration pricing isn’t in having initial success. Most people will give high-discounted products a shot. The issue is to have them continue buying your product after the penetration price is no longer in effect. In order for a penetration pricing strategy to be successful, you have to start with an end in mind. What do you want to achieve?
The goal of a pricing strategy isn’t the initial market share, it’s to have people continue buying your products at the full price. Confusing the initial success with the real goal of this pricing strategy can lead to disastrous results. Unlike the skimming pricing strategy, penetration pricing starts to form the bottom.
If you don’t have a clear plan of how you’ll keep people continue your products, your entire efforts can be rendered useless. You came into the market with a highly-discounted price, people start buying your products like crazy, your prices went up to the original tags, people went back to buying their own products and that’s it.
Not only is this difficult to recover from, it can also you cost you lots of money along the way. Some business can offer a penetration price with no profits -or even taking a small loss- to penetrate a new market. If you want your efforts to produce results, start your penetration pricing strategy with a plan of what you’ll do next to make it succeed.
Penetration pricing: Advantages and disadvantages
When it comes to launching a new product, there are plenty of pricing strategies to choose from. Penetration pricing is just one of those strategies. Like any pricing strategy, penetration pricing has its own advantages and disadvantages. For you to decide whether this pricing strategy is right for you or not, you need to take the advantages and disadvantages into consideration.
Creating a tempting offer
If you’re selling any kind of consumer goods, penetration pricing is usually a good market entry strategy. For similar goods, the price is one of the main factors that affect people’s choices. Having an item they buy regularly at a super-discounted price is definitely tempting.
Most people will try the product so they can save money on that purchase, and they get to try something new at a discounted price. Even if it didn’t turn out to be as good as they expect, getting it a lower price makes the trial process as low-risk as possible.
A major advantage of penetration pricing is that it will get people to try the product. Whether this is a good thing or not depend on the product that you’re selling though. If you’re selling a relatively low-cost item that people buy on a regular basis, penetration pricing can be an excellent choice.
However, if you’re selling a luxury good, this strategy can make your products look cheap. Once people have this perception about your product, changing it later can be difficult. In that case, price skimming can be a strategy that works better for the product you’re selling.
False customer loyalty
False customer loyalty is a major downside to the penetration pricing strategy. In some cases, people buy the product just because it’s being sold at a greatly reduced price. They don’t really like it that much. When this is the case, people usually return to whatever product they used to buy before once the penetration price is over.
This is a problem that is very common with this strategy. To avoid this, there are many things that can be done. Anything from customer loyalty schemes to raising the price is gradually possible. Which measures to take to avoid false customer loyalty depends on the product that you’re selling and whether people like your product or not.
How can Sniffie help?
Setting a proper penetration price is a process that requires extensive research. Having accurate data about the market prices and your competitors is critical for success. By knowing this, you can set a penetration price that achieves your goals without depleting your resources. Doing all of this manually can be a lengthy and costly process. That’s where Sniffie can help.
With Sniffie’s price monitoring system, you can easily conduct a thorough market research and measure the results of your penetration pricing strategy.
Want to learn more about pricing?
Are you keen to learn more about pricing? Head to our Pricing Academy, from there you can find our latest articles about pricing and other free resources related to pricing, be sure to check them out!
Check out our latest blogs
“We don’t have enough historical transaction data.” “We don’t have big enough sales volumes.” “We don’t want to be the cheapest.” “We can’t change prices
Behind the retail & e-commerce buzzword: Actionable definition and 4 practical examples of dynamic pricing
Dynamic pricing is one of those buzzwords that gets thrown around so much that it barely means anything anymore. That’s why we decided to ask