Here are some of them: Less competition:Ī new market entrant with a low price can sometimes take competitors off guard (this is more likely with a stealth launch.) Your business may face less competition and opposition marketing in the early launch period.Īlso, some companies may not be able to lower their prices significantly, which prevents them from joining the race you are leading. Penetration pricing comes with a lot of benefits for retailers or SMB owners. Advantages of The Penetration Pricing Strategy Low prices are the door opener for many new businesses. High prices could hamper sales and limit growth during the crucial launch period. Companies that sell price-elastic products also use the penetration strategy. The hope is that the sales volume and long-term value of the customers\ will offset the lower than average cost. Penetration pricing is typically used when a high demand for a new product or service is anticipated. Competitors then have less time to react before the company gains market share and becomes the new standard in the eyes of many consumers. The company sets a bargain price while maintaining the value of the product or service. The price is removed as a barrier to getting people to try the new product or service. If it is an innovative product, this principle works simultaneously. After a period of growth, the company typically raises prices to increase profits and reflect the product’s actual value. The goal is to take some of your competitors’ customers for both the short-term, but more importantly, the long term. The initial cost is lower than their competitors’, drawing in more shoppers. Penetration pricing occurs when companies introduce a low price for their new product or service. The aim is to generate demand, build a customer base quickly, and maximize brand loyalty in a short period of time. In a penetration pricing strategy, the focus is on market share rather than profits for a given period. How Does a Penetration Pricing Strategy Work? You might also want to read: How to Price a Product: Strategies and Methods For Retail We’ll guide you through the different penetration pricing tactics, how to implement them, and the pros and cons of this pricing strategy. In this article, you will learn the intricacies of the penetration pricing strategy. As a result, penetration pricing is one of the best strategies for breaking new products into the market, aiming to gain consumer awareness and a competitive edge.Ī penetration pricing strategy aims to introduce consumers to your product and create brand loyalty, ultimately leading to them spending more money down the road. For many consumers, nothing determines their buying decision more than price. Retailers must think outside the box to make waves in the market to set themselves apart from the competition. With intense competition and consumer demands, the barriers to entry in a retail market are very high. In a market where consumer trust and brand loyalty are crucial, many consumers loathe switching brands or trying new products. The low price helps penetrate the market by attracting the attention of more consumers than a higher price would otherwise, allowing the brand to gain a foothold against competitors in these early stages. Brands often use this pricing strategy for a product with strong competition or a relatively new idea. Penetration pricing consists of setting lower prices (sometimes even with a negative margin) than the competition to spur sales during the initial launch period.
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