![]() ![]() The Yin and Yang of Devising a Pricing Strategy If the new product or service meets their needs, customers are likely to keep buying it, even once they lose the initial discount and have to pay more. There is also the risk that once a penetration pricing campaign ends and the company raises its prices, its newfound customers can prove fickle, choosing to switch back to their old and familiar provider. ![]() Such a scenario makes it much more difficult to raise prices moving forward and damages everyone’s bottom line. This can trigger a price war and condition consumers to expecting unrealistically low prices. Unhealthy price competition as competitors counter a company’s penetration pricing strategy with aggressive price cuts of their own.When a brand that’s associated with high-end service or merchandise suddenly offers a new product at cut-rate prices, consumers may take this as a sign that the company has cut corners and is no longer offering a premium product. Diminished brand perception due to heavy discounting. Sometimes price-cutting can backfire, as customers tend to equate higher prices with better quality.This can put pressure on the corporate budget, as greater product demand increases production and marketing costs without a commensurate rise in revenue. Cost and budgetary pressures due to increased demand. Penetration pricing amounts to a grab for market share, but it also entails a short-term hit to the company’s margins.Disadvantages of penetration pricing can include: The Disadvantages and Risks of Penetration Pricingĭespite its advantages, there are also downsides to consider. It also allows the business to take advantage of economies of scale. ![]() Achieve high inventory turnover by increasing demand. This can be a big competitive advantage, since selling in high volumes greatly enhances the market’s perception of a company’s brand.Create brand loyalty by familiarizing customers with the company’s product line. If consumers are impressed with the quality and utility of the new item they’ve been purchasing, they may be more inclined to try the company’s other products and favor its brand going forward.This is especially true if the product is of better quality or provides more features than competitors’ offerings. Gain a foothold in the market by quickly attracting a customer base. If the new product or service meets their needs, customers are likely to keep buying it, even once they lose the initial discount and have to pay more.Offering it for a limited time at a low, introductory rate can help set the new product apart from the rest of the field and attract customers who may already be using other, similar products from competitors.Īmong its many advantages, penetration pricing can help companies: The goal behind a penetration pricing strategy is to launch a new product or service effectively into an already crowded market, fostering a successful market entry. Penetration pricing is simple to implement and a relatively easy way to differentiate a new offering from other products already on the market. The Goals and Advantages of Penetration Pricing The product can only become viable if the company can recover its costs, so the hope is that once the product is established, customers can accept a price increase based on the value that they’re receiving. But while this approach can help a company find acceptance for a new product, it also reduces – and possibly eliminates – its profit margin, as the introductory price may not cover the cost of all the raw materials, labor inputs, and development resources than were needed to bring the new offering to market. This market penetration pricing strategy builds awareness and facilitates the company's entry into the market, maximizing its impact and reach.Ĭommon examples of penetration pricing are the first-time buyer discounts offered by many retail web sites and the free trial periods offered by many streaming services. The idea is to lure consumers away from the competition by tempting them to try a new product with a lower introductory price. Penetration pricing is a pricing strategy used to attract customers to a new product or service during its initial offering. But how do you determine that sweet spot? There are many different pricing strategies that a small business can use, but when the goal is to attract customers for a new offering, the strategy known as “penetration pricing” is often a wise approach. When the price is right, your product will sell. ![]()
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