When pricing their wares, most businesses have an inclination to charge the maximum amount possible. In some cases, however, a firm will strive to undercut competitors’ prices in order to increase sales for a new product. Market penetration pricing refers to a strategy in which the price of a product is set low following its introduction in the market. Once the product has found a market segment, the business raises prices to a more reasonable and expected level.
Penetration pricing works on the belief that a product has enough buyers to make up for the lower price point. It can also be used as an aggressive tactic against competitors, which will have to lower their prices in response or risk being forced out of the industry.
Pros of Penetration Pricing
Market penetration pricing offers various benefits over other strategies. Here are some reasons it’s worth using.
Increase Sales Volume
One of the biggest benefits is that it can help a company increase its overall sales volume. Lower prices can lead to higher sales volume, which allows companies to boost their overall market share at the competition’s expense. Lower prices can also engender goodwill among existing customers and encourage new ones to try your services.
When clients see that prices are lower than normal, they may believe that they are getting an incredible deal on a quality item. Not only will they be more likely to purchase from you again, but they might also encourage their friends and family members to give your firm a shot.
Lower Production Costs
Along with boosting sales, employing a market penetration strategy could potentially lower overall production costs. As sales volume increases, companies can turn over inventory more quickly. As a result, they may be free to purchase goods from suppliers in greater volumes at discounted rates.
Penetration pricing is also an effective strategy for firms looking to enter new market segments. Along with generating more sales from existing customers, market penetration pricing lets businesses find new buyers that may not be willing to pay higher prices for similar goods. Diversifying your customer base to include people of different income levels will ultimately increase your company’s stability and success.
Cons of Penetration Pricing
Of course, every pricing strategy has its drawbacks. Here are some of the negative consequences that could occur with penetration pricing.
If your projected boost in overall sales volume doesn’t materialize after lowering your prices, then you’re going to feel the consequences. Lower sales volume at lower prices means lower profits, which is a situation you don’t want to be in. Additionally, companies that use market penetration pricing may find that their new customer bases abandon them when prices start to rise again.
Just as your new clients may abandon you for the competition when your rates rise, your long-term customers may also leave you when prices drop. Penetration pricing strategies carry the risk of giving an impression that your products are cheaply made or less desirable. Your clients may opt to go with pricier competitors that they perceive as providing better quality.
Even if market penetration pricing does work as intended, businesses should be aware that the strategy will only be effective for a limited period of time. In fact, companies who maintain penetration rates past the introductory period almost inevitably face a loss of profits. When a business does raise prices, it should be prepared for clients to express some dissatisfaction, as they are now paying more for the same goods and services.
Best Businesses for Market Penetration Pricing
While market penetration pricing can be an effective strategy, not all businesses or products are equally suited for it. Generally, penetration pricing is most effective when both product demand and competition are high. By keeping prices low, a business can prevent prospective competitors from entering the market while maximizing its own market share.
Additionally, this pricing model is best suited for companies with strong production and distribution setups already in place. Since lowering prices will ideally boost market share, businesses need to make sure they can keep up with demand or risk the wrath of their customers. For this reason, penetration pricing works best for goods that can be mass-produced at a low cost per unit.
Market penetration pricing can be a great strategy for companies planning to introduce new products. Businesses that are considering this technique, however, should be sure they have a solid promotional strategy in place. The goal is to keep profit potential high without sacrificing your new, larger market share.
Penetration pricing is just one strategy of many that can boost your business. If you’re ready to appeal to your customers’ emotions as well as their budgets, check out our how-to article on psychological pricing strategies.