Introduction
It may be overwhelming when you are just entering a new market, especially in a highly competitive business. Regardless of how amazing your product is, you will come across many difficult and sometimes intimidating tasks. However, with penetration pricing, you can enter the market and make the entire process more manageable. If you use penetration pricing, you will able to set good deals for your customers and get a hold in the market. This method comes with implementing low prices to draw customers from your competitors. In this blog, we’ll take a look at what penetration pricing is, what its pros and cons are, how to set up a penetration pricing strategy, and how to measure it.
What Is Penetration Pricing?
Penetration pricing is a strategy that a company launches at an extremely low price, clearly aimed at gaining an important market share immediately. This is often necessary to gain massive consumer acquisition and avoid price cuts, as many competitors follow the same strategy. When a business enters a market for the first time or releases a new product in an existing market, a market penetration pricing plan comes into play. It can also be used during periods of price deflation and devaluation using first-mover advantage for improving market shares.
Pros of Penetration Pricing
Heavy use: Penetration pricing enables high levels of use of the company’s product or service before competitors have a chance to challenge it. Starting from creating value for your users to designing products that stand out and reduce risks defines the charging model. Are your customers going to use your product frequently? Is the value of your product more long-term than short-term? Why is it valuable to a good market?
Dominant in markets: A penetration-priced company enters the market before competitors have a chance to respond and transfer as many customers as possible.
Economies of scale: All your price strategies will be very successful: a large number of sales and your company will be able to achieve economies of scale, which will lead to the marginal cost being lowered.
Increased revenue: Customers who find a bargain in a product or service are more inclined to return in the future. Furthermore, this enhanced goodwill trust results in favorable word of mouth.
High product turnover: Penetration pricing increases inventory turnover, which pleases vertical supply chain partners like retailers and distributors.
Cons of Penetration Pricing
Pricing anticipation: When a company uses a penetration pricing method, customers frequently expect low prices. If prices rise gradually, buyers may become unsatisfied and stop buying the product or service.
Decreased customer loyalty: Penetration pricing tends to attract bargain customers with low customer loyalty. Customers may switch to competitors if they find a better price. Price cuts, while useful for generating immediate sales, rarely result in customer loyalty. Low costs can harm your company’s image, which may lead customers to regard it as cheap or of low quality.
Price war: A price penetration strategy may lead to a price war. A price war can extend for long periods. This reduces overall market profitability, and only strong companies can survive a long-term price war. Small and newly entered companies may not be able to survive a price war.
Inefficient strategy: Price penetration is an ineffective long-term pricing strategy. It is usually a better idea when you are entering the market with a price strategy that your company can stick with in the long run.
How Can You Set Up a Penetration Pricing Strategy?
Setting up the right price strategy requires proper planning and evaluation of the correct pricing goals. If you’ve decided on a solid plan for your business, here’s what you’ll need to do to use it properly:
Conduct a market analysis: You will have to do extensive research in order to understand your customers’ preferences, your competitors’ pricing strategy, the general scenario of the industry, and your market segment.
Perform a cost-benefit analysis: Determine the key production, marketing, and distribution costs associated with bringing your product or service to the market at a price lower than competitors but still covering costs.
Low benchmark price: The price you set should be much lower than the cost compared to other products on the market.
Decide upon a promotional strategy: Your promotional activities will communicate your product’s value proposition and your messaging about the benefits of your product to your stakeholder groups.
Use segmentation: Target customers so you send them messages whose design is tailored to the market’s specific needs and tastes, sending messages to those who are more price sensitive.
Package the offer: Package deals offer value at a slightly higher total price and are a great way to upsell and increase average transaction values.
Monitor competitors: You should track and react to shifts in the competitors’ pricing or product options.
What Are the Types of Penetration Pricing?
Skimming Penetration Pricing: This method involves charging a high initial price for a new product or service and then gradually lowering the price over time. It targets early adopters or customers who are willing to pay a premium for the uniqueness of the product. When prices drop, the company will reach a larger customer base.
Promotional Penetration Pricing: It gives temporary discounts to customers. It can create rapid understanding and discussion about the product, thus leading to early sales and market entry.
Bundle Penetration Pricing: The price of each product is given separately for its products. These strategies can attract customers by providing tangible benefits and encouraging them to spend more money on the company.
Geographical Penetration Pricing: Local marketing takes into account factors such as purchasing and competition. Businesses can expand into new areas by adjusting prices for individual markets.
Cost-leadership Penetration Pricing: Businesses that want to offer the lowest prices in the market while maintaining profits through efficiency, economies of scale, or innovative cost-cutting strategies. These strategies can help organizations gain a competitive advantage and capture a larger market share.
Conclusion
The goal of using the penetration pricing method is to attract a large number of customers at a fast pace and establish a solid customer base. Once you create a large customer base, you can raise the prices of your products to boost profitability. This method is frequently adopted by new e-commerce enterprises or businesses expanding into new markets.
The penetration pricing approach is also an effective technique for entrepreneurs and marketing professionals looking to build a dominant position in the industry swiftly. However, it is important to do a thorough analysis of the target market and audience and ensure the operational capacity required to maintain initial growth.
Furthermore, you should also understand how customers perceive value, which is important for innovation in the offer. It allows for price increases after a market leadership position has been established. Careful strategic planning and evaluation of potential problems are required to maximize the benefits of this strategy and make educated decisions that are in line with the company’s long-term objectives.
After you apply the penetration pricing strategy to your business, you should check if it is working or not. You can do it by checking sales volumes, market share, customer acquisition and retention rate, profit margin, ROI, and brand perception. Head over to Rubick.ai to discover cutting-edge solutions.
