A penetration pricing strategy is a great way to break through a market and build both awareness and popularity of a brand, service, or product. If you are looking for proof that penetration pricing works, look no further than giants such as Netflix and any other service where you get an initial discount.
The proof is that penetration pricing is a great way to sink your hook into new customers, and it’s why so many are using it. Let’s discuss penetration pricing strategy, how it works, what the benefits are, and how you can use this in your online business.
What is Penetration Pricing?
A penetration pricing strategy is a type of marketing and sales strategy that involves trying to get new customers and take customers away from the competition by setting the initial cost of the goods or services at a very low level.
Generally speaking, this is a strategy that many new online businesses use who are looking to rapidly expand, although it is a business model still in use by many larger businesses too.
A very extreme form of penetration pricing is known as predatory pricing, which involves setting the cost of your goods or services just slightly lower than the next cheapest alternative. By setting the initial price at a very low level, the hope is that people will not resist such a good deal. But, again, it’s about getting people to think that they are getting the best deal if they join now.
In mostly all cases, this low initial cost will eventually rise, often to the point where it may even cancel out the initial discount. A good example is how your internet provider tells you that you only pay $20 per month for the first six months, and then after those six months are up, they’ll raise the price.
Penetration Pricing Strategy vs. Price Skimming Strategy
There is some confusion between penetration pricing and price skimming, so let’s explain. In fact, these two are really opposites. Price skimming is about setting the initial cost of a product or service very high, which is an excellent strategy for luxury products that are supposed to be very high-end.
This is a good strategy if you are not too concerned about getting vast sales from most of the population. However, it is ideal for luxury brands that want a select number of high-end customers. More often than not, a price skimming strategy will include the price slowly dropping over time to become more competitive with the rest of the market.
Penetration Pricing Strategy: Pros and Cons
As is the case with really anything, there are both good and bad aspects of penetration pricing.
One of the most significant advantages is that penetration pricing allows a company to get customers to quickly accept and adopt their new goods and services. Simply put, people love great deals.
This strategy often helps generate a lot of goodwill and trust in a brand because people appreciate it when they can buy goods and services at more than affordable prices, thus creating repeat customers.
On that same note, if you are going for an economy of scale with high sales numbers at low prices, this goes a long way in increasing profit margins.
Yet another advantage is that penetration pricing allows you to sell your inventory at a fair rate. In other words, if you have a very high inventory turnover, those above you on the supply chain will also be happy and maybe even willing to give you better discounts on bulk orders.
Above all else, perhaps the most significant benefit is that it allows companies to quickly establish market dominance. Competitors usually don’t see this kind of thing coming, and they don’t have much time to react. Time is money, and this reaction time makes a difference.
Although people appreciate a good deal and will keep coming back for more, this may only be the case if you keep offering low prices. Unfortunately, this pricing strategy usually attracts many bargain hunters who will show your brand no loyalty whatsoever. If they find a better deal, they’re out the door.
If you gradually increase prices, you will lose some of your initial customers.
Selling your goods and services can negatively affect the reputation and image of your brand. If you sell goods and services cheaply, you may become known as a cheap bargain brand.
Although this is an excellent short-term strategy, it’s not the best pricing technique for the long run.
Some Relevant Examples of Penetration Pricing Strategies
Let’s take a quick look at some of the best examples of penetration pricing strategies that you might just be familiar with. One example would be Android phones because Android prices its phones at much lower prices than Apple and other competitors, thus attracting new users.
Another example is how Netflix offers a one-month free trial, or big monthly discounts for a short period, before hiking the price. Then, of course, most people complain when the price goes up a few dollars, but at that point, they’re hooked on the content and often not willing to part with the service.
What is the Advantage of Penetration Pricing?
One of the main advantages is that it allows a company to have its services and products quickly accepted by as many customers as possible. What it comes down to is assuming marketplace dominance by providing much lower initial costs than the competitors.
When Would a Company Most Often Use Penetration Pricing?
Penetration pricing strategies are often employed by companies who are just entering a market and quickly want to assume market dominance. However, this tactic can be effective when it comes to launching new services and products.
What are Some Other Effective Pricing Techniques?
Penetration pricing is not the only kind of pricing. If this doesn’t sound like something for you, you should check out premium pricing, bundle pricing, economy pricing, and price skimming.
What is Meant by EDLP?
EDLP is a specific type of pricing strategy somewhat similar to penetration pricing. However, in penetration pricing, the cost of the goods or service will usually increase, and it usually doesn’t take long for this to occur. On the other hand, EDLP stands for everyday low pricing, a strategy that involves keeping prices rock bottom for a long-term period, with the price rising after a given amount of time, or maybe not.
Which Pricing Strategy is Best?
If you are just entering a market and you want people to switch over to your goods and services, then either penetration pricing or everyday low pricing are two strategies to consider.
The bottom line is that if you are a new market entrant and you want to make a splash by taking the air out of the sails of your opponents, a penetrating pricing strategy is a way to go. Of course, it is not the only effective pricing strategy, but it is one of the best.