Pricing strategies help you harness the power of pricing in a way that helps you boost your profitability without increasing your costs. Got you interested? Well, penetration pricing is the practice of offering a productor service at a lower price initially for attracting the customers. Irrespective of the industry in which a business operates, penetration pricing strategy can prove to be effective in creating a customer base. Whether you are a marketing professional or management, having an understanding about a penetration pricing can help in improving your career prospects. And in today’s blog, we will deep dive into the concept of penetration pricing strategy.
Let’s have a look at what penetration strategy is and who can benefit from the strategy.
What is Penetration Pricing Strategy?
Penetration pricing is a marketing strategy which businesses utilize while introducing anew product or launching a product in a new market. It aims at offering the product at a lower price than required to make a profit. Now, this is actually the oldest trick in the book. To enter the market with a low price to cut the competition. The purpose of the strategy is to make as many people as possible try out the new product. As we want to attract new users but also some loyal users of the competition. So, free samples and low prices may attract them in a better way assuming the audience is price sensitive. To begin with, many factors determine the exact pricing of the product such as the number of competitors in the market, similarity with their product, and how they price their products.
By selling the product/ service at a lower price, the marketing professionals can retain their customers in the long run even after increasing the prices for their product. Penetration pricing strategy enables a business to widen its customer base and improve profitability in the initial phase itself.
Who uses Penetration Pricing Strategy?
Marketing professionals in diverse industries make use of penetration pricing strategies for their marketing activities. A part from using the strategy for promoting the organization’s products, the marketing professionals utilize their insight for penetration pricing strategy and determine if a competitor uses them. You might wonder how that would work. Well, it helps in adapting to the marketing tactics of the competitor’s prices. Basically, you can have a strategy based on the already tried and tested formula. It has a better success rate. PriceIntelGuru provides the best platform to experiment and try out new pricing strategies for all kinds of businesses.
Advantages of Penetration Pricing Strategy
Here’s a look at some benefits of the penetration pricing strategy:
1. Introduction of a New Product
When a company is introducing a new product in the market, the penetration pricing strategy can help in gaining customers and becoming an established brand in some time. Customers always have resistance to new products as they already might be using a similar product of a different brand. So, to encourage first-time usage, companies have to take resort to many marketing tactics. And this strategy can help you gain the right momentum for your business.
2. Generate Positive Branding
Branding contributes to making a product or service more appealing to the customer base. It can be in a way of communication or creating a buzz for the more strategized audience. With the help of a penetration pricing strategy, a business can develop a positive brand for its customers. When a business offers products/ services at a lower price it will make the customers a positive view of the business. Also, this boosts the word-of-mouth publicity of the brand in the complete target segment.
3. Increase Market Share
With lower prices, a business can attract a significant number of new customers. Some customers will make a switch from the competitors to your brand which will help in increasing the market share as well as improve the overall position of the brand in the market. Now, this switch will not ensure the customer loyalty. As branding makes you drive sales to the next level of the customer life cycle that is customer loyalty for a long time. And that makes you have the larger piece of the cake in the market.
4. Attracting Loyal Customers
Offering high-quality products at a price less than the market price can make the customers use the product. They are also highly likely to get more satisfaction from the purchase as compared to buying from the competitors. It means that they might continue using the product even after the prices rise.
5. Improve Cost Control
When using a penetration pricing strategy, a business is aware of its pricing along with spending. It helps in improving the overall control of the total cost. Costing makes all the difference. Getting the right costing can help you earn more profits. Though the matter is completely subjective to all businesses, cost drives the price in every way. This strategy helps you identify the loopholes in the business and enables you to work on better cost control and provide better products at the best price to your customers.
6. Increase Profits from other Products
When customers are attracted to a product that is priced low, they are likely to generate interest in the brand and explore other products as well from the brand that is priced regularly.
Disadvantages of Penetration Pricing Strategy
Here’s a look at some challenges that businesses face while implementing the penetration pricing strategy:
1. Customer Might Switch to Price Increase
If the customers don’t find any drastic difference between your product and the competitor’s, they are likely to switch back to the competitor once the price of your product increases. It can be prevented by figuring out an aspect or feature of your product that is superior to the competitors. The feature must be marketed as a reason for the customers to keep buying. This can be prevented by coming to the pricing experts like PriceIntelGuru and helping you convert the leads into customers within no time.
2. Might Not Be a Suitable Strategy for Small Business
A Penetration pricing strategy can affect the profit margins of the company in the short term. Small businesses may find it challenging to sustain during this duration. The solution is to use the strategy for a short period of time or apply it to a limited number of products.
3. It can Misrepresent Product Quality
Lower prices for the products might mislead some customers into believing that the product is of inferior quality. This situation can be prevented by making it clear to the customers that the price of the product is temporary by mentioning the original price as well in the marketing message.
4. Lead to Pricing Competition
Reducing the prices might encourage the competitors to follow the suit. It can lead to several companies reducing their prices for being competitive in the market. A business can prepare itself by anticipating this situation and developing ways for preventing it before the strategy is implemented.
Penetration Pricing Strategy Examples
1 . Streaming Company
A movie streaming business enters a new market with a penetrative pricing strategy and attracts the customer by providing a free trial for 15 days followed by a subscription for three months at half the price of competitors. Once the customers make the switch, they might decide to stay with the streaming channel as they find it preferable to go back to the competitor. The new company can attract customers by offering quality services as lower prices than usual.
2. Phone Provider
A mobile service provider wishes to gain new customers and make them switch from their competitors. They come up with a special holiday offer which consists of a free Smartphone and a 10% discount on the phone bill for 3 months after signing up with them. Though it will lead to lower profit temporarily, the company can assume to compensate and gain additional profit with the help of a significant percentage of new customers.
The above-mentioned example and the benefits of penetration pricing strategy show how businesses can utilize it to their favor. Just like any other strategy, there are some pros and cons with the penetrative pricing strategy as well. However, well planned and executed strategy can help in anticipating the challenges and finding a solution thereof.
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