When a new product enters a market with many competitors, it will be hard to gain a market share. Penetration pricing is a pricing strategy used to attract customers to a new product and entice them to buy it.
This pricing strategy is applicable to products that are bought often and where there is a lot of competition. This pricing method works for brands looking to penetrate a crowded market, and gain a lot of sales.
In penetration pricing, the prices are kept low to lure customers to buy your product and try it. For most customers, the price is a prime motivator for choosing one product over another. Very low prices will attract customers, many of whom will decide to try the new product even if they have a favorite brand in that category.
This helps you get brand recognition in the market, and gain a huge volume of sales. As the prices are low, the profit margin will be low. So volume of sales can help offset this by increasing revenue and reducing production cost.
So, Who Can Use This Pricing Strategy?
As mentioned, penetration pricing keeps profit megan low. It may even be non-existent. So, only those companies that have a good manufacturing capacity where they can make products in huge volumes can afford this. The sheer volume of sales that they may get by keeping the price so low can help recover production cost,even if they make no profit.
They must also be able to sustain this pricing for sometime, until they have established a presence in the market.
It is applicable only in markets where the products have high demand, with repeat buys. Where the product can be easily made by other brands, so it is important to quickly gain a customer base.
The Advantages of Penetration Pricing
- This pricing strategy helps gain customer attention for new projects. Many will at once at least pickup and examine the low-priced product. Thus, the brand becomes familiar among customers
- Many customers will buy the product, because of the low price
- These customers, if they are satisfied with the quality of the product, may switch over from a brand they have been loyal to for a long time
- If enough customers move over to the new brand, it can benefit from large volume of sales
- Most of its competitors will be caught off-guard and be unable to react quickly
- Many established small companies might be unable to compete on price with the new company,and so their sales will suffer
- Thus, the penetration price can also marginalize many of the existing brands, expanding the reach of the new product
- Eventually, many of the prime competitors may be eliminated, and the new company may even become the dominant brand, and be able to gradually increase prices
Disadvantages of Penetration Pricing
- Only companies that have the capacity to manufacture products in scale can benefit from this pricing strategy, as large volume of sales is essential
- The customers they gain by this pricing strategy might be mostly bargain hunters who always buy based on price and do not remain loyal to a brand. So they are just as likely to switch over to another brand that offers the same product at a lower price
- Many of the larger competing brands might also lower prices, mitigating the advantage of penetration pricing. This can trigger a price war that can be damaging to the brand that introduced the penetration pricing
- Eventually, the brand will want to increase the product price to remain profitable. However, customers may expect the prices to remain low and may not react well to increased prices after the initial marketing.
- Many customers may switch back to their previous band after the price increase. This will greatly reduce the customer base and the sales volume will decrease, which even the increased profit margin may not be able to balance
- The strategy may not work at all. Resulting in huge losses to the company leaving them with a huge inventory of unsold products on their hand
- Low pricing may also damage a brand’s image, give a perception that it is a low-end brand
To Sum Up
Penetration pricing can work for companies with a good production capacity, who have good financial stability. They should even be able to withstand losses for a while before there market stabilises. It may not work if customers perceive the product to be of low quality. If customers like the product and sales increases, the company will plan to increase prices gradually. However, they may never be able to raise the prices high enough, as most customers may see them as a ow-end choice and think a high price is unjustified.
Penetration pricing, if used well, can be a good pricing strategy to gain entry into a saturated market, to get customer attention. The brand may gain a loyal customer base if their product is perceived to be good, It can help eliminate a lot of the competition, and enable the brand to become the standard or even a virtual monopoly in the market, enabling them to increase prices.