Penetrating Pricing Strategy: A comprehensive guide
Pricing strategy, like every other business element, may make or mars. It is one of the ultimate keys to a successful and profitable business. Every business needs to understand how to establish a sustainable price model for their products and services. This includes knowing which one is best at a particular phase of the business. And which one should come as a rescue plan if one fails. For example, a penetrating price strategy will work best for introducing a new business in the market. While a value-based price strategy will be great for a well-known product.
What is a Penetrating pricing strategy?
Penetrating pricing strategy is a marketing tactic whereby businesses lower the entry price of their new products or services in other to attract customers from their competitors with a fore-plan of raise the price to the standard marketing price after winning over some customers from their competitors.
Penetrating pricing strategy is used to steal customers from their competitors with the optimism that the customers will stick by once they start enjoying their product while they raise the price to its usual price. This marketing strategy can also be used by new businesses that are just launching by cutting down the pricing of their product or services till they get a good number of customers. Some businesses also use penetrating pricing strategy to monopolize the industry by forcing competitors out of the market in other to dominate and control the entire market.
Advantages and Disadvantages of Penetrating pricing strategy
Every pricing strategies, including penetrating pricing strategy has their advantages and disadvantage. Understanding these pros and cons will help decide if price penetrating strategy is the best option for you.
Advantages of Penetrating Pricing Strategy
- Get new customers for your products or services
- It increases marketing shares and value
- An increase in demand can reduce the cost of production to enhance profit.
- Sweep competitor out of the market
Disadvantages of Penetrating Pricing Strategy
- Customers may return to the competition when the price goes up
- Brand image may be at stake
- The profit margin may be lower for a longer period
- Competitors may cut down their prices also
- Ineffective for a long-term pricing strategy
- Brand loyalty is not guaranteed
Note: Learn how to write an effective sales copy that sell.
Tips to Applying Penetration Pricing Strategy in your Business
Penetration pricing strategy can be used by both new businesses and old businesses when introducing a new product into the market. However, for best understanding of this article, I will be using a made-up company to analyze how a use a company can penetrate the market with price. This company is made-up and I will love to call it “PudPizza.
PudPizza, a fast restaurant plans to start selling pizza with little difference in taste and flavor. The standard market price of a box of pizza is $15. However, in other to penetrate the market, PudPizza decides to sell it for $12 with the plan to increase the price to the normal market price after getting a high number of customers. It also hopes the customers will stick by and not go back to their competitors.
To achieve this, company A needs to come up with a penetrating pricing strategy starting from analyzing the cost of production, decides their entry price, work out strategies to keep their customers when they raise their price to that standard market price.
Analyze the cost of the production
The first action PudPizza needs to do is to analyze the cost of production for Pizza and also work out their Cost-Plus pricing strategy. By doing this, PudPizza ensures it doesn’t tamper with its capital to avoid selling at loss. Hence company A will separate the production cost of Pizza from its predicted profit when they start selling the Pizzas at the original market price.
After working out this profit, Company A will now deduct a particular percentage off the profit it would be making when it has started with the standard market price.
Tips: Company A can also leverage on economic elasticity of demand by cutting their cost of production while increasing their production rate. The sales volumes will boost its profit margins.
Deciding the entering price
After making a comprehensive analysis of the cost of production of Pizza, the next thing PudPizza will do is to decide its entry price. While a very low entry price will penetrate the marketing effectively, PudPizza must be very careful to avoid Loss Leader Strategy.
Futhermore, customers at times perceive products with lesser prices as subquality products. Considering the fact that this is a new product that will be competing with existing products. PudPizza must to ensure the price of their Pizza is not too low to avoid being considered as sub-quality. And shouldn’t be too high that customers will wouldn’t find the difference in price worthy of switching from their completion. Instead, company A can choose a price range of 50% off their original profit (after removing the cost of production).
PS: The best way to combine penetrating pricing strategy is to combine it with a logical event that will make customers understand why they are getting it at a cheaper price. This can eliminate the burden of sub-quality.
Decide the time phrase
Penetrating pricing strategy is best for temporal period. PudPizza should to decide the amount of time this penetrating price offer will last before it switches the standard market price. PudPizza can achieve this either by deciding the percentage of market share it would like to win before implementing the original market price. Or set a duration of the number of months or years they will be using the penetrating pricing strategy.
To achieve effective results, PudPizza should ensure it gives its new Pizza an effective promotion to reach a more people. It will be best if PudPizza can make a comprehensive analysis of the number of customers they can win within a particular time. And when doing this, PudPizza must understand their competitors may also reduce the price of their Pizza to contend with them. This may result of price war. This means their penetrating pricing strategy might last longer than they plan.
Note: Alway have other pricing strategies in place in case the market is not working in their favor.
Monitor customers’ behaviors
So much penetrating pricing strategy is awesome, it has its odds. The most dangerous time is when you increase the price to market price. Generally, increasing the price of a product or service is something that can break down a business. Both new or old. Hence, PudPizza needs to be extremely careful and ensure they monitor their customers’ behavior before increasing the price of their Pizza. PudPizza may first decide to increase the price of the product by a small percentage. This will help them monitor the reaction of their before incresing the price to original market price.
Another pricing strategy PudPizza can use is to adopt a “mirror penetrating pricing strategy”.
This is a concept of increase the size of their Pizza while they sell it at the original marketplace. This will still mean company A company will still be selling at a cheaper price compared to their competitors judging by the quantity. However, the positive side to this is customer will be buying it at the normal price, and bringing the quantity down will have very little effect on them.
If this will backfire at all, it will be maybe the quality of the new product is questionable. And penetrating pricing strategy isn’t about selling sub-quality products at a cheaper price. It is selling quality products at a cheaper entrance price in comparison to the standard market price.
Practical Example of Penetration Pricing Strategy
Google is a very good example of a business that uses a penetrating pricing strategy to introduce new products. Google has used this strategy to sell products like google domain, google cloud, google office suite, etc. The idea is to contend against their giant competitors like Microsoft Azure and Amazon web services.
Basically, let put aside the fact that Google offers their customers 25,000 IOPS (input-output processor), while Amazon and Microsoft offer 20,000 per volume. Google price is still drastically cheaper to both Amazon Web services and Microsoft Azure.
This article establishes that penetrating pricing strategy is an excellent mechanism to introduce a new product to the market. And it is also great to monopolize an industry.
- Taiwo Sotikare
- Taiwo Sotikare is an outstanding freelance writer and blogger with 5 years of experience. He has written hundreds of articles on Freelancing, Entrepreneurship, Career Development, Writing Tips, and many more.