Penetrating Pricing Strategy for Business Owners

Like every pricing strategy in business, the pricing strategy can add or remove from your business’s success, depending on how you implement it. 

As an entrepreneur, you must establish a suitable price model for your 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. At the same time, 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 strategy whereby businesses lower the entry price of their new products or services to attract customers from their competitors with a fore-plan of raising 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 raising 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 to dominate and control the entire market.

Advantages and Disadvantages of Penetrating pricing strategy 

Every pricing strategy, including penetrating pricing, has its advantages and disadvantages. Understanding these pros and cons will help you decide if a 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 competitors 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

Tips for Applying Penetration Pricing Strategy in your Business

Both new and old businesses can use the penetrating pricing principle. Old businesses may use it to introduce a new product or package into the market. Like MTN when introducing a new data plan. At the same time, new businesses can use it to launch their business activities. A good example was Opay when introducing oRide, oFood, and other products into the Nigerian market. 

In this section, I will walk you through the steps to take when using the penetrating pricing principle of your business. 

1. Analyze the cost of the production

The first action for all businesses that want to use the penetrating pricing strategy is to analyze their cost of production. Doing this ensures you don’t tamper with your business capital and avoid selling at a loss. Hence it would be best if you separated 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, you can now deduct a percentage of the profit it would be making when it started with the standard market price. 

2. Deciding the entering price

After making a comprehensive analysis of your production cost, the next thing is to decide your entry price. While a very low entry price will penetrate the marketing effectively, you must be very careful to avoid a Loss of Leader Strategy.

Furthermore, customers at times perceive products with lesser prices as subquality products. Hence you must ensure the price of your product is not too low to avoid being considered sub-quality. And it shouldn’t be too high that customers will find the difference in price worthy of switching from their completion. So instead, you can choose a price range of 50% off their original profit (after removing the cost of production). 

3. Decide the time phrase. 

A penetrating pricing strategy is best for a temporal period. Therefore, you must know how long the penetrating price offer will last before switching to the standard market price. 

You can achieve this 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 using the penetrating pricing strategy. 

Furthermore, it would be best to use an effective promotion to reach more people to achieve effective results. So do a comprehensive analysis of the number of customers you can win within a particular time. 

And when doing this, you should also foresee that your competitors may also reduce the price of their products. For example, Pepsi reduces the soft drinks price to kill Biggi drinks out of the market, and Coke currently sells their drinks at the same price as Pepsi and others. 

4. 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 the market price. Generally, increasing the price of a product or service can break down a business—both new and old. Hence, you need to be extremely careful and monitor your customers’ behavior before increasing your product price. 

You may first decide to increase the product’s price by a small percentage. This will help them monitor their reaction before increasing the original market price. 

Another pricing strategy PudPizza can use is to adopt a “mirror penetrating pricing strategy.” 

This is a concept of increasing the size of the product while you sell it at the original marketplace. This was a strategy Pepsi used when their increased the size of the normal drink bottle from 50CL to 60CL to overhaul their competitors. 

Conclusion

This article establishes that a penetrating pricing strategy is an excellent mechanism for introducing a new product. And it is also great to monopolize an industry.