Benefits, Limitations & Examples of Penetration Pricing
According to research, 17% of consumers buy a product due to its low price rather than quality. In such circumstances, it becomes very important to pay heed to prices, and penetration pricing is quite good for that. So, let's have a look at how it can help you!
Penetration Marketing is a strategy by which you can cross the threshold of a new market with comparatively low and below-average prices. Penetration marketing is used by several firms to introduce a novel product or could be a service, in front of people. In order to get into competition while entering the market, low prices will help you face the competitors.
We are going to discuss two major companies that got leverage with the help of this pricing strategy.
The American retail chain that has used a penetration marketing strategy to get a hold of the market while selling at below-average and low prices.
There are many firms that choose to increase prices once they capture the market, but Walmart doesn't do so. Walmart still offers its products at below-average and low prices.
The simple reason behind not increasing the prices is cost leverage. The per-unit price that is offered to Walmart is quite less, which provides its cost leverage and higher-profit margins at below-average rates.
It is no surprise that Walmart is able to do this by comparing prices and setting the best price strategically.
Netflix entered the market at quite low prices but gradually increased its prices as it captured more subscribers.
In 2010, when Netflix entered the market, they started offering their subscriptions at $7.99 (standard plan). But as more people started using it, gradually, the prices increased to $12.99 per month (standard plan).
When it comes to such types of services, there are many more factors influencing the usage of services other than pricing like the content offered, UX's design, etc. Netflix took care of all these factors, along with its pricing.
Netflix had a risk of losing price-sensitive customers while increasing the subscription prices, but they still stayed on their strategy.
Although, Netflix is not a retail company- their pricing model is worth paying attention to even for the online retailers.
Penetration Pricing is a strategy that works well with other pricing strategies, too, and yields great results. You can initially use this strategy to attract a large number of customers to your store, and then, you can induce them with various offers in hand.
Gradually, you can build the trust of your clients and customers by merging it with even more strategies.
The most painful part of the process is to convince the first customer. Afterward, word of mouth helped, along with many other tactics.
It requires careful planning for implementing this strategy. Some of the important questions are
Would I be able to lose some profits temporarily?
Is my business type in accordance with a price penetration strategy?
Most importantly, there is a need for a price comparing software in place to understand the current pricing landscape. Penetration pricing works the best only when the company is completely aware of the competitor’s pricing so that they can set the lowest among them. There is also the tactic that retailers can use to choose the right products to keep the price low as against their competitors.
pricecheker is the UK’s leading price comparison software to monitor prices and stock availability to initiate the penetration pricing strategy. Compare prices of the peers before setting your product prices. This gives a competitive advantage and better information about the market.
Q1. How would I be benefitted from Penetration Pricing?
Increases the volume of your sales
Initially, when you are at low prices, customers will get a mind-set that you are cheap and you’ll get price leverage
As soon as customers are attracted, your next strategy could be building brand trust and loyalty.
The newcomers will think twice before competing with your prices.
Q2. What are the problems I might face while implementing Penetration Pricing?
Risk of losing customers who believe high quality equals to high prices
Damage the image of the brand as people may pre-assume about quality
In case you initiated a price war, it would disrupt your strategy.
Q3. Can you list out some examples where penetration pricing is already used?
Some companies like Spotify, Netflix, etc., offering subscription services entered the market with penetration pricing and made a space for themselves in the market while increasing prices over time.
Retailers and online e-commerce businesses can make use of the best price comparison software to target the market. With growing softwares in the industry pricechecker offers best the service of comparing prices and aiding in effective strategy building for businesses. Apart from just comparing prices, the SaaS solution also helps in comparing stock and promotions that is more suitable for businesses aspiring to remain successful in the long run.