Penetration pricing strategy is a marketing technique where a business sets a low price on its product or service in the initial phase of the launch to attract more customers and then slowly increases it as it gains popularity.
Penetration pricing strategy is mainly used by startups which have limited resources but if implemented strategically can help a business gain a foothold in the market at a relatively low cost.
It offers numerous benefits for an organization such as customer acquisition, substantial increase in turnover and higher profits.
To learn how to apply a penetration pricing strategy effectively read on…
1) Why use a penetration pricing strategy? With penetration pricing, businesses can establish their brand as well as benefit from increasing demand by adding more buyers due to lower costs. In addition, startups tend to focus their resources on creation of the product rather than on marketing thus penetration pricing enables them to cover their cost before they start investing heavily in advertising.
2) how is it different from low pricing? Low pricing strategy can also achieve the goal of gaining market share but compared to penetration pricing, low price strategy risks decreasing profits due to low margins which makes it unsustainable unless you intend to make sacrifices such as cutting back on quality or service. Therefore, businesses that use this strategy usually have deep pockets and are not afraid of running into losses for a certain period of time till sales volume increases.
3) Penetration pricing strategies usually involve offering products well below average market prices (offering discounts).
However, there are several other strategies available for your reference:
a. Loss-leader pricing:
– having one or more key products with low price and the rest of the product line priced at regular rates
– helps attract initial customers; can also stimulate other profitable purchases later on
b. Psychological pricing:
1) odd-number prices ending in 9 (eg. $599, not $600): – suggest an item is cheaper than its competitors
2) bundles: – offering several items together at a discounted price to make it appear like a better deal
3) ‘limited offer’: – time-constrained sales tend to intensify demand as consumers fear they may miss out if they don’t buy quickly
4) playing with numbers: – having an up year round but will have periods where you have sales for X amount of days or there’s a certain percent off
c. Psychological pricing:
1) odd-number prices ending in 9 (eg. $599, not $600): – suggest an item is cheaper than its competitors
2) bundles: – offering several items together at a discounted price to make it appear like a better deal
3) ‘limited offer’: – time-constrained sales tend to intensify demand as consumers fear they may miss out if they don’t buy quickly
4) playing with numbers: – having an up year round but will have periods where you have sales for X amount of days or there’s a certain percent off
5) psychological pricing: avoiding even numbers and instead using odd numbers and decimals (eg. instead of $999, try $997.50).
Penetration pricing strategy in business can be used to establish a foothold in an industry. The goal of penetration pricing is to enter the market with a low-price strategy to attract customers away from competitors. Penetration pricing can be very effective for new companies because they are able to undercut their competition’s prices, generate cash flow and build market share before having to raise prices.
Absolute Pricing Strategy
Another common method used by businesses when setting their retail price is based on what that item typically retails for or its “brand value.” The goal of this strategy is to sell the product at the percentage markup it typically sells for, or as close as possible. For example, if your store typically sells those $100 sneakers for120 then you will set the price at $120. This method is typically used by big box retailers, but it happens in other sectors too. For example, auto dealerships often sell new cars at a price that is “marked up” from the invoice price, so it will be understood that the buyer is getting a good deal on their purchase because they are buying below cost (in some cases).
Custom Pricing Strategy
The final strategy for setting retail prices is to set them based on what you believe people will pay for your product. A key factor when using this method is knowing your competition and leaving room for them to try and undercut you with lower prices while still trying to make a profit yourself. The risk of this pricing strategy is that if you guess wrong about what consumers see as a reasonable price, you will either not get any sales or have to accept a loss on each unit sold.
Pricing Tactic Summary
These three strategies work well in the context of your brand and business model. To maximize your profit it is best to understand all three of these methods so you can use them where they work best for you or even combine them into a hybrid pricing strategy that works beyond just one aspect alone. With some practice and knowledge of how consumers perceive prices you should be able to set more profitable prices for your products.
Thus penetration pricing strategy is most important for a newcomer to a market or a business who is trying to establish itself in the existing market. However, as soon as you have earned some market share and have attracted loyal customers towards your brand you should look for ways to bounce back from dropping your prices further. Unless there are no substitutes available in the market that can fulfill customer’s needs then it is difficult to sustain under-charging them for long.
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