For new companies, one of the biggest challenges is standing out in a competitive market. Penetration pricing is one strategy that you can use to make a splash and draw in new customers. While this strategy can be very effective, it also has some downsides, especially if it is not implemented correctly. Here’s what you need to know about penetration pricing and how you can use it as part of your business strategy.
What is penetration pricing?
Penetration pricing is a strategy where companies offer their products or services at a relatively low price shortly after releasing them. The idea is that these low prices will attract more customers and build brand loyalty, and then they can increase the price later on. By offering lower prices than the competition, you can use penetration pricing to stand out in a crowded market.
Pros of penetration pricing
There are many advantages to using penetration pricing when launching a new product or service, especially for startups that haven’t built up a loyal customer base yet. Here are some of the reasons advantages of using penetration pricing for your business.
- Helps you draw in new customers. Today’s savvy consumers are always looking for a great deal on the products they like. Offering low prices is a great way to draw in price-conscious consumers and build brand loyalty. Low prices also mean that skeptical consumers can try out your product with minimal risk involved.
- Can help you stand out in a crowded market. If you are entering into a particularly crowded space, it can be difficult to stand out from the crowd. Penetration pricing can give your company an edge over competitors and even shift the way the market is perceived.
- May build brand loyalty. Once consumers have tried and enjoyed your product, it’s likely that they will come back to it out of convenience in the future – even if the price changes. Penetration pricing helps new brands draw in loyal customers right from the start.
Cons of penetration pricing
While penetration pricing can be very effective, it also has some potential downsides. It isn’t going to be the right strategy for every company, and it can go south very quickly if it isn’t implemented correctly. Here are some of the cons of this pricing method to consider before implementing it in your business.
- Low prices can be off-putting to some customers. Not every shopper is focused on getting the lowest price possible. Consumers that are most concerned about value may be put off by low prices, assuming that the low price is indicative of low quality.
- Eventual price raises can drive off customers. In most cases, penetration prices won’t be sustainable forever – you will eventually have to raise them. Unfortunately, this can drive away customers who were only buying from you due to the low pricing.
- Competitor prices can go down as well. In order to compete with your pricing, your competitors could lower their prices dramatically as well. If you all keep driving your prices down, your business model could eventually be unsustainable.
Types of penetration pricing
There are many different ways you can use this pricing method with your online business. The following are a few common pricing strategies that have been effective in the past.
Low introductory price
This is one of the simplest and most common forms of penetration pricing. With this strategy, you offer a low introductory price for your product or service and then increase the price later. If you are using this strategy, it’s important to communicate to your customers that you are offering introductory pricing. Not only is this important for ethical reasons, but it can create a sense of urgency among consumers, encouraging them to purchase now while the price is still low.
Buy one, get one free
Buy one, get one free, or BOGO sales, are another popular form of penetration pricing. This is a good option for products that consumers periodically repurchase or that they would need multiples of.
Offering free trials
Free trials are another very popular form of penetration pricing for services. We see this most frequently with software and website subscriptions, but you can use this for any type of subscription service. This offers a huge benefit to consumers, as they get to try the service with absolutely no risk to determine if they like it.
Freemium pricing
Freemium pricing is another price strategy that is popular for web services. With freemium pricing, the consumer gets access to some features for free but will need a paid subscription to access all of the features.
Penetration pricing vs. Price skimming
Price skimming is the opposite of penetration pricing and is also a popular strategy. With price skimming, the company targets a segment of consumers that are already very invested in the product and offers slightly higher pricing than the competition. Because these consumers are very invested in the product, they are willing to purchase it even at a higher price.
How to implement
Penetration pricing works best for products that are elastic, which means that changes in demand are directly related to changes in price. It’s also best for markets that have several different companies selling very similar products.
When implementing this pricing method, you’ll first need to consider how low you want to drop your prices. If you drop your prices too low, it will make it very difficult to keep your business afloat no matter how high the demand is.
It’s also important to make sure that you are choosing an ethical penetration pricing model. Consumers can get frustrated when prices go up unexpectedly, which means your pricing strategy could backfire. This is why free trials or introductory specials are great options because consumers know that pricing will increase.
How Print Bind Ship can help
Penetration pricing could be a great way for your company to break into the market. Not sure where to begin? Consider working with a third-party logistics firm like Print Bind Ship. We can help your business take off with pricing strategies, inventory management, fulfillment, shipping services, and much more.
Contact us today for a free consultation!