What is Penetration Pricing?
When we launch a new product we have two options, either to price the product at a very high price or gradually discount the product, this strategy is used to maximize profits. This is called Price Skimming. Another strategy is to launch a product at a low initial price to capture market share and then gradually increase prices, this is called the Penetration Pricing Strategy.
This means enabling a very low initial price on a product in the short term, with the aim of compensating in the longer term by upselling or cross-selling the new buyers you gain.
Sometimes, a business with a new offering may use penetration pricing to gain a huge market share of customers before any strong competitors come into the area. Then, they may raise their prices once they’ve established the market penetration they are after.
What is the Purpose of Penetration Pricing?
Penetration pricing works to disrupt the industry by introducing new items at low prices to entice buyers to stray from competitors. This helps notice by potential buyers quickly build up a customer base.
The aim of penetration pricing is to:
- Capture market
- Pull in buyers from other competitors
- Generate product demand
- Create product loyalty in the long-term
The penetration pricing tactics work best when the goods are best suited to a mass market, like a subscription or repetition.
When to use a Penetration Pricing Strategy?
A penetration pricing strategy is most likely to be powerful when the goods are highly impressive and in markets where there is a small difference between Product A and Product B.
If a customer is more sensitive to price changes and if the comparable items are virtually the same as yours, it’s the perfect strategy to make price the only differentiator.
Because, as you know, demand will increase if you drop your price. And if your inventory offers better value-for-money products, buyers will quickly buy your offering over an alternative.
If you wanted to launch a new product on the market, a market penetration pricing strategy may be a great way to get your online store or product noticed.
Which factors to consider with penetration pricing?
Before including a penetration pricing strategy, you should weigh the significance of brand identity and brand loyalty with your customers.
If brand identity is very important to your business's success, penetration pricing may not be a good fit for you, as buyers may perceive the brand as ‘cheap’ or low-quality.
If product loyalty is strong with your buyers, you may have higher success with penetration pricing, as your buyers will continue to purchase from you whether you upsell or increase your pricing. Here is a complete guide to Penetration Pricing and how you can use it in your online store.