The concept of penetration pricing can be a bit confusing to many with regard to its positivism or negativity. Whether penetration pricing is a good strategy or all it does is inflict wounds to a business will be up to you to decide. This is because it has differing impacts on the ideas that businesses across the world try to sell: image, time saving, and innovation.
Some companies have accepted and applied the strategy of penetrating pricing with the aim of improving their performance and increase profitability. However, other companies view it as a bad strategy for their businesses since they do not produce any significant increase in profits. The manner in which you respond to questions such as, when, why, and how to use penetration pricing, depends on how you view its impact on your firm’s image, ability to save time, skills to innovate. This is because those aspects will inevitably determine a firm’s profitability.
What Is Penetration Pricing?
Penetration pricing is a form of price allocation strategy that businesses use. It has the aim of increasing their market share through low prices.
For example, if the benchmark price of a box of chocolate is $6, company X may decide to lower its prices for a box of a new brand of chocolates to around $4.50. The main objective of company X here is to attract more customers to the new brand. Consequently, it is increasing its gross sales and profits. This strategy is commonly referred to as the special introductory offer that businesses use in marketing.
Who Needs Penetration Pricing the Most?
Businesses around the world try to identify the most effective pricing strategies that will cover all their ideas, i.e., image, innovation, and time saving. Penetration pricing is one of the strategies that companies use. They aim to improve their brand performance through lowering their prices.
However, specialists recognize that only businesses targeting time saving can consider penetration pricing as an effective and reliable strategy. This is because a consumer would benefit from buying a commodity from suppliers that deliver goods in a timely manner. That supplier also needs to sell them at lower prices in comparison with other suppliers.
When, How, and Why to Use Penetration Pricing?
Penetration pricing is common to companies aiming to introduce a new product in the market. Following the principles of this strategy, these businesses have to allocate a low entry price to the new product. This is in order to entice more customers into buying it. The principle behind this is that the customers are likely to prefer the new product to the existing products because of the small price. As a marketing strategy, in short term penetration pricing may lead to:
- Increased market share;
- Higher sales volumes;
- Low profits.
In contrast, higher profits are likely to appear in the long term owing to the higher market share and sales volume.
Unlike innovation and image improvement strategies that don’t address to the penetration pricing idea, time saving happens. If a certain supplier approaches you as a retailer about a new product whose quality is better or similar to the existing products, you are likely to consider buying it. This comes especially if the supplier promises to deliver the product faster than other suppliers do. This is because time is money. Also, you want to save time and money for your businesses during any business transaction. This way, you are able to eliminate all possible delays.
3 Ways in Which Penetration Pricing Can Be Effective
1. Impact on the Market
Penetration pricing is a misconceived strategy especially. This is since it prevents businesses from attaining their highest profits. At the same time, they are denying consumers of the quality they desire. Many business experts argue that this pricing strategy only ends up inflicting wounds to operations.
This is because a number of products in the market will end up reducing their prices in due time because of the preference for more innovations. As a result, they argue that it is ideal for the price reduction process to occur naturally while a business profits rather than lose its value before attaining the desired results.
2. It is a Pull Factor
Other business owners may argue that the application of the penetration pricing strategy is a pull factor for a business. From their perspective, they are likely to concentrate on the new brand rather than developing better innovations.
The businesses, however, are not going to make any profits and at the same time are not able to meet the demands of the customers.
3. Seeing This Pricing as It Is
It is, however, a bad idea for a company to consider penetration pricing as a strategy to help strengthen its image and innovation. If a buyer prefers to maintain his/her image when using certain products, how is lowering the price of a new brand with less on its image going to affect his or her decision? This means that maybe brand X affords such a customer with an image like that of being a connoisseur. Then, lowering the cost of a new brand Y to attract the customer would do more harm than good to the company.
For instance, if a customer prefers the products of a certain high profile company, reducing the price of a new product from low profile firm is not going to affect his or her decisions. Being a loyal customer of the high profile firm’s innovations, the customer will still buy from the high profile firm. This is even if their products are more expensive than those of the competitor.
Thus, a careful consideration of all the ways in which penetration pricing can apply in a business and their impacts can go a long way in improving your pricing ideas. It is vital that business individuals recognize that like any other idea, penetration pricing has its pros and cons. They need to address these before its application.
The pricing strategy in place should be able to allow a business to maximize on its profits. Meanwhile, it will minimize on its costs, and meet the needs of its customers.