Penetration pricing strategy is a business strategy in which a company sets a low price for a product or service to gain market share. This strategy is often used by companies that are new to a market or that are trying to gain a competitive edge.
When used ethically and with a long-term view, penetration pricing can end up being an excellent solution to take over our target market. In this article, we’ll identify how to implement penetration pricing for our products or services.
What is penetration pricing?
It is a marketing strategy where a company offers a low price for its product or service to gain market share. Or rather, this is what most fits the description. But, what most marketers do is beyond this definition.
This is mostly used by business owners to get an initial customer momentum. As such it’s not designed to be a long-term marketing technique since other competitors will see an opportunity to attract the same customers with cheaper alternatives.
Sometimes, penetration pricing can also be a good strategy to use to drive out your competition and win in the game, but this in most cases is an aggressive approach of it and is referred to as Predatory pricing, which can tend to be illegal in parts of the u.s.
Dumping your product abroad
Dumping can be referred to as the process in which most product / service based providers start selling their product in a foreign market. This although initially ends up bringing in new customers and creates hype, can be a double-edged sword.
While selling your product to new customers might sound like a good thing, and help to increase interests in a newer marketplace. Dumping can end up hurting us as well, since people can end up buying the product from foreign markets and bringing it into the local market.
How to use Penetration Pricing?
Timing is key when deploying and using business strategies, but most importantly, using the right strategy matters as well. So, when it comes down to it, you should only use penetration pricing when you’re confident that your business requires it and also can accommodate it as well.
This can be done by identify the most basic requirements for implementing this strategy, let’s take a look:
- Low Product Differentiation (a.k.a Not so unique product) – Most retail based businesses cannot claim to have a unique product due to the similarity between most competitions in the market. So, using pricing strategies at this point is not only ideal, but also recommended.
- When Cheap is Just Right – Some businesses, if not most, require that you set a boundary on your prices, this is common in the food industry. Where pricing something at a higher rate will just open up an opportunity for the competition.
- Utilizing Economies of Scale – If your marketplace is huge, and can be scaled exponentially, its almost compulsory to use pricing strategies to position yourself for growth.
When can it go wrong?
Okay, so now that we’ve got an idea of what Penetration Pricing is and when to use it is also important to know when to NOT use it as well.
First of all, penetration pricing can be quite tricky to use. If you go too far, you can even end up harming your business. Here’s how:
- Always Low – Your customers initially might be only attracted to your product / service due to the cheap price. And, this could end up harming the brand image of your company.
- Never Loyal – Customer loyalty is something to die for. No business on this planet doesn’t like seeing their repetitive customers metric increase over time.
- This Means War – Your competition is obviously not going to stand still whilst you drag away all their customers. They’re going to retaliate by coming at you with lower prices on their end. Which would trigger what’s known as a price war.
- Short-Term Commitment – Commitment just like loyalty is hard to get. Your customers must become highly vested in your product to not let go of it, and that’s almost impossible to achieve.
What’s the cure?
The treatments for businesses that face the disadvantages of using penetration pricing strategy are as such:
- Data Data Data – It’s no secret that data is the new oil. It holds potential to help sustain businesses and help with stimulating growth. Try to identify whom your customer is and creating groups of persona profiles to help comprehend your user base.
- Building a Customer Relationship – Your customers might be looking for more than a business to buy from. Most customers need trust, and if your business can provide a proper solution to this in your marketplace, you can assume that they’re more likely to stay. You can utilize psychographics to help increase your businesses understanding of its customers.
- Quality Matters – Apple doesn’t offer discounts and promotional offers. A reason for this is because they have high quality products. Sometimes, in order to satisfy customers and get them to keep using your product, your product itself should satisfy them.
Although it can be tough at most times to position your company in your industry. There are many strategies and tactics that can help to gain traction and increase customer growth.
Penetration Pricing is one of many contributing business strategies that helps to grow your customer base. But, before you implement such a strategy, learn to identify the importance of why you would need this. Does it make sense to use penetration pricing? These questions are more likely important than anything else. Because, penetration pricing is a double-edge sword, it can help your business grow. And could hurt your business severely.
Also, an important statement to make about penetration pricing, is that if you push on it too hard. Your business can end up being vulnerable to factors such as but not limited to cheap price expectations, lower customer loyalty, brand value discrimination and etc. So make sure to identify the right reasons to use penetration pricing, before you go ahead.