What is Penetration Pricing?
Before launching a new product or service, the businesses use a variety of pricing strategies and methods to determine its selling price. Some pricing strategies focus on recovering the cost of production, while others help businesses to generate more revenue and profits. Unlike other pricing strategies, penetration pricing strategy helps businesses to penetrate a new product or service into the competitive market.
What is Penetration Pricing?
While adopting the penetration strategy, businesses offer a new product or service to the customers at a lower price during the initial release period. The low price makes a larger number of customers avail of the product or service. At the same time, many customers switch from competitors to the new product r service to save money.
According to Investopedia,
“Penetration pricing is a marketing strategy used by businesses to attract customers to a new product or service by offering a lower price during its initial offering. The lower price helps a new product or service penetrating the market and attracting customers away from competitors.”
Your business should adopt a penetration pricing strategy to create demand for a new product or service in a short amount of time. In addition to making more customers aware of your product or service, the pricing strategy will make customer switch from competitors. But you must remember that penetration pricing, like other pricing strategies, has its own advantages and disadvantages.
What are the Major Advantages of Penetration Pricing Strategy?
Make Customers Aware and Interested
Unlike other pricing strategies, penetration pricing is effective in making more customers aware of the new product and driving the sale of the new product. The lower price will make customers switch from competitors and promote the product or service through word of mouth.
Often businesses find it challenging to promote and sale a new product or service by beating the competition. Penetration pricing strategy helps businesses to create demand for and drive the sale of the new product by beating the competition. The lower price of the product will make many customers buy the new product as well as switch from competitors.
Promote Brand Loyalty
While launching a new product or service, businesses have to invest huge resources to create a popular brand and promote brand loyalty. They can adopt a penetration pricing strategy to make more customers buy the new product. The surge in sales helps businesses to promote brand loyalty by offering superior quality, value, or experience.
Curtail Production Cost
A business can easily boost the sale of a product or service by adopting penetration pricing. The surge in demand and sale of the product will help the business to curtail overheads by scaling up production. The economies of scale help businesses to avoid increasing the price of the product or service after the initial launch period.
A business can easily disrupt the marketplace by offering products or services at a lower price. The competitors will need some time to reduce the price of their products. Hence, a business can easily acquire and increase market share by offering products or services initially at a lower price.
What are the Important Disadvantages of Penetration Pricing Strategy?
Difficult to Meet Customer Expectations
Penetration pricing strategy makes businesses to increase the price of the product or service after the initial launch period. The increase in price will affect the sale of the product directly. The customers will expect your business to offer the product or service at the same price. Also, the increase in price will make many customers switch to competitors.
Negative Brand Perception
According to Entrepreneur.com,
“Whether customers perceive a product as “cheap” or “affordable” is crucial to its success in the marketplace. But if companies think they lack control of this perception, well, they are simply wrong.”
Often customers associate the lower price of a product or service to poor quality. Hence, businesses cannot drive the sale of luxury or premium items by adopting a penetration pricing strategy.
Chances of Starting a Price War
There were many instances when a price war was started as a company reduced the price of a product or service in a competitive marketplace. There are always chances that your competitors will offer the product as a price lower than yours. Hence, a business must prepare itself to fight a price war while adopting a penetration pricing method.
When Should a Business Adopt Penetration Pricing Strategy?
While adopting the penetration pricing method, you must evaluate the pros and cons of this pricing strategy. In addition to boosting the sale of the product or service during the initial launch period, your business must keep in place a strategy to sustain the demand and sale in the long run. That is why; you must consider a slew of factors while adopting a penetration pricing model.
- The demand for and sale of a product is directly driven by its price
- Your business can curtail production cost by achieving economies of scale
- The product will be produced and launched in a mass-market where there is adequate demand
- Your business is ready to face competition and fight price wars after launching a new product
- When there is product standardization instead of product differentiation
Penetration pricing strategy helps your business to boost the sale of a new product or service during the initial release period. The lower price helps the product or service penetrate the competitive market. But there are always chances that the customers will switch to a competitor as the price of the product or service increases after the initial release period. You must consider integrating penetration pricing with other pricing strategies to drive sales and promote brand loyalty in the longer run.