It doesn’t take much to enter a market, and this is even harder when there is a brand with a recognizable and long-term customer base. This is a market that targets new products and services. Whether you are stronger or not than existing products does not matter; the competitive environment is merciless. However, this can be solved by using penetration price.
On the basis of the thought that everyone wants a great deal, penetration pricing allows you to gain a foothold in an entirely new market by being a price competitor. By providing an incredibly competitively priced product than the average cost of a similar product, you can get more customers, which is helpful to your growing business faster. In addition, an initial increase in prices will also make it more difficult to raise prices in the future.
What is penetration pricing, and how does it work?
Penetration pricing is the method of selling products for lower prices that companies use to capture markets that market leaders dominate. Through this strategy, these firms get into the market or place the competitor’s product aside in favor of their own. This is done by pricing their product below the competitor’s in order to gain customers and reduce their market share.
This would allow companies to set a pricing level unexposed to the price expectations and perception of current consumers, thus capturing them. Rather than competing only with other traditionally aspirant brands on how valuable their products are, companies with this market strategy increase their customer base via a low-pricing strategy.
After they have built their customer base, the companies will then be in a position to increase the prices, which can be done in order to capitalize on the already-stated willingness to pay. By this means of ramping prices up, which the retailers cut, they risk losing customers who would have abandoned them, which is more likely that they will do it again when prices increase.
Importance of penetration pricing
Having a penetration pricing strategy is not only one potential way, but it also provides multiple benefits for your business. As the cost of the product looks appealing to a huge number of customers, it will eventually result in more sales, giving you a competitive edge and, in some instances, even creating market disruption if you are the first to launch. Further, this is also the avenue that you can employ to introduce a perception of value and subsequently win customers’ loyalty.
Penetration pricing is also a tool crucial to your business in many other ways apart from the ones mentioned above, including market entry, product launch, and competitive positioning. It empowers you to break into new territories, allows you to compete and even outrun predecessors, and drives client generation.
Penetration pricing: Pros and Cons
Penetration pricing is considered a revolution in the world of business marketing; however, it is not without flaws. Given below are some pros and cons of penetration pricing:
Pros
High adoption and diffusion
By pricing at low levels and thereby being able to breach the competition rapidly, companies can also obtain an early acceptance and adoption of their products and services by their customers.
Marketplace dominance
When a company makes use of a penetration pricing strategy, its competitors usually get pushed out of the way and may find it difficult to come up with counter-strategies in the near future. It provides the opportunity to switch several clients over to the use of the new service.
Economies of scale
Clearly, such a pricing strategy leads to a high demand that allows the business to achieve economies of scale and brings down the average cost of individually produced goods.
Increased goodwill
Customers who are satisfied with their purchase experience will most likely want to come back for the same item or another offer. Subsequently, these heightened feelings of satisfaction are followed up by positive word-of-mouth.
Cons
Pricing expectation
When a firm is pricing its goods through the penetration pricing strategy, customers may demand permanently lower prices. If a slow increase in price happens, customers might feel disenchanted and decide to refrain from further purchase of products or services.
Low customer loyalty
Pricing penetration will normally result in capturing bargain hunters, traders, or those with non-loyal credentials. Customers seeking for the lowest price are most likely to leave the one they found unsatisfactory for others if they find a better opportunity. Price reduction is indeed a practical and real solution, but sadly, it does not always achieve customer loyalty.
Damage brand image
Low prices could lead to the deterioration of brand image, making customers back away from the brand, deeming it as poor quality or low-class.
Practical Tips
- The fight is double-edged — not only the battle for a market position but also the effort to take customers away from the competitors. While considering whether to make use of skim pricing or penetration pricing to establish a firm foothold in the competitive markets, experts recommend that budding companies should have all the financial, operational, legal, and marketing (and other) resources to keep themselves running until the targeted market share is secured.
- Without the public, nobody will be able to get rid of this stuff that doesn’t go to any job and, as a result, won’t generate money. Therefore, be aware of the potential drawbacks and do not go for the backdoor methods that will chase your regulars away and ruin your reputation.
- Consider associating a penetration pricing strategy with selected promotions in this regard, such as limited-time deals, holiday offers, etc.
Conclusion
All in all, the penetration pricing approach is an effective technique that gives enterprises the opportunity to quickly release a product or service into a mature market through relatively cheap prices.
Stand out, curve the market acceptance trend over time, and keep your business growing for a long time if you get these three components right. Rubick.ai employs cutting-edge AI solutions and can significantly help businesses in the implementation and optimization of penetration pricing via its advanced AI technologies. Partner with Rubick.ai and realize what your pricing strategy has to offer!
