Switching brands isn’t a popular practice among consumers.
90.2% of people consider themselves equally loyal or more loyal than they were a year ago.
It’s why we always buy the same products at the grocery store. Or why we go to the same shops to buy clothes.
For new brands or companies releasing new products, this isn’t good news.
Add to this the fierce competition small businesses face, especially when competing with large corporations. It’s hard to bet on new entrants when you’ve been using the same products from long-standing brands.
Penetration pricing provides a solution to both problems. And in this post, we’ll take a closer look at this pricing strategy to help you learn the fundamentals so you can figure out if it’s right for you.
Knowing what penetration pricing is, its advantages and disadvantages, and looking at some examples can help you decide if it’s worth your time.
What is penetration pricing?
Penetration pricing is a pricing strategy that involves offering new products or services at a lower price point (marginal cost) to shoppers. The low price reduces conversion barriers, making it easier for emerging brands and products to gain a foothold in the marketplace.
New market players also use penetration pricing as a differentiation from the competition. This strategy enables them to:
- Build brand loyalty
- Gain market share
- Generate substantial demand
- Disrupt the market
- Attract new business from competitors
Penetration pricing often comes at the merchant’s expense since you’re cutting into your profits to give consumers a reason to like and trust your brand.
The trade-off is often worth it. If your product is top-notch, lowering your prices is only a “hook” to reel them in. When done right, they’ll be more than willing to do business with you.
Advantages of penetration pricing
Some of the key advantages of penetration pricing include the following.
Become market leaders. A price penetration strategy catches competitors by surprise. It buys you time to steal the spotlight (and their customers as well.)
Increased customer interest. This depends on the type of retail customer you’re targeting. But generally speaking, offering affordable options can lead to a high adoption rate and can get people talking—ultimately resulting in referrals from free word of mouth marketing.
Economies of scale. A penetration pricing strategy aims to switch over many users–especially for mass-market goods. A higher sales volume offsets your low pricing strategy. Another benefit of this is that fast-moving products can also qualify for bulk discounts.
Increased goodwill. Who doesn’t like a bargain? Bargains can lead to repeat business. A higher level of goodwill increases a customer’s lifetime value.
Reduced competition. Some companies can’t lower prices significantly, which prevents them from joining the race you’re running. But as you raise your prices according to your intended profit margin, you should devise a way to compete effectively with them.
Boosted customer loyalty. This strategy is one of the quickest ways to build loyalty around a product launch. Low prices draw them in, but an excellent product keeps them coming back–even if the price tag goes up.
Disadvantages of penetration pricing
Penetration pricing does have a few drawbacks. Here are the ones you need to consider.
Insufficient funds for production. Small companies often struggle to reduce their cost-per-volume, especially when competing with large companies. That’s because low profitability can jeopardize their business.
Lost opportunities. Many luxury shoppers would pass “cheap products” over. If you offer luxury products, your brand image may suffer and your target market might drift away from you. Another way you can lose potential customers is by initially setting your prices low and then raising them.
Reduced market prices. Price matching is common among competitors, particularly if their products are similar. Should your competitors decide to play your game, this can lead to a price war, affecting you and the industry as a whole.
Failure to deliver results. Not all market penetration pricing strategies are a success. Setting the lowest price is also usually unrealistic in lower cost industries.
3 types of penetration pricing strategy [with examples]
To break entry barriers, new retailers need to come up with strategies to attract and retain new customers. When you leverage penetration pricing strategies, you learn to play the long game. You might incur losses at first, but if it works for you, you’ll be rewarded.
A key part of making this strategy work is establishing a deadline for penetration pricing promotions. Deadlines motivate shoppers to act early to limit the loss of profits.
These three examples illustrate how penetration pricing works. Find out how it can benefit you.
Low introductory price
The most common way to penetrate the market is to have a low introductory price. Promoting a new product or service with an introductory discount can catch your customers’ attention.
When you’re confident in your new product or service, this strategy helps you gain as much exposure as possible. Just make sure to create a product pricing plan that you won’t lose too much money on. After generating enough awareness, you can increase the price to recover any short-term losses.
Reducing the price of your initial offering only works to your advantage if people buy them regularly (Think: everyday items). If you offer a food subscription service and discount the yearly fee, it’ll take more time to achieve breakeven.
That’s why we often see small and medium-sized businesses, such as Princess Pearls Boutique, leveraging this strategy. Their new soap bundle is available at a discounted price.
Buy one, get one free
Buy One, Get One or BOGO is a common penetration pricing strategy (and a type of sales promotion) that involves giving away an item for free with a related purchase. It works better than offering 50% off discounts because the word ‘free’ has a powerful psychological effect. When offered a free gift, we behave differently, according to Dan Ariely.
Instead of selling a product at a fraction of its original price, the customer buys other items at normal or higher prices, which can make up for the discounted product.
It is a popular way to move deadstock and slow-moving merchandise-but also a great way to introduce new products. These new products can be linked to top sellers in a similar category.
Here’s how skincare brand Olay encourages shoppers to try out a new minimalist skincare regime.
We often see free trials in subscription-based products and services. When you give your target audience a free taste of your service, you let it speak for itself. Once the free trial ends, clients can choose to commit to regular billing if they’re happy with it.
And if they aren’t, you can use their feedback to improve your product and make it more competitive.
Netflix and Amazon are prime examples of companies that leverage this type of penetration pricing strategy. But this approach isn’t limited to software and streaming service providers, SMEs can also implement it by offering a brief trial period for their products.
Bespoke pet food company Kasper & Kitty, offers a good example of penetration pricing. You can get a free sample of their tailor-made dry dog food for two weeks if you’re curious about how your pooch will respond to their meal plans.
The trial duration is up to you. It can vary from one week up to one month. As long as you give them a chance to try your product, you can alleviate their fear of commitment and encourage them to keep an open mind.
Use penetration pricing to crack the code to success
Integrating penetration pricing into your marketing strategy can decrease the friction associated with introducing new products. This enables you to build a customer base over time before you shift to a high price point and earn you a spot in a competitive market.
But this strategy isn’t for everyone. SMEs need to figure out if it’s the right strategy for their business. The penetration pricing examples above should have given you an idea of what would work for your business.
About Francesca Nicasio
Francesca Nicasio is Vend's Retail Expert and Content Strategist. She writes about trends, tips, and other cool things that enable retailers to increase sales, serve customers better, and be more awesome overall. She's also the author of Retail Survival of the Fittest, a free eBook to help retailers future-proof their stores. Connect with her on LinkedIn, Twitter, or Google+.