One of the most important factors that leads to sales is price.
Also, it is the price that influences a customer’s decision. Naturally, if it’s made obvious to the customer that they’re getting something for less, they’ll be inclined to buy.
Whether you’re about to launch a new product or start a new wholesale food store, starting out at a lower price can captivate customers and keep them coming back.
That’s where penetration pricing steps in. The trick here is to start with a low price, which tempts customers away from other options, even if it means not making much profit right away. The focus is on the bigger picture — growing over time.
While this technique is quite relevant for manufacturers looking forward to launching a new product, you can use it as a retailer too. This guide is all about penetration pricing and will help you garner customers while generating sales in the long run.
What is Penetration Pricing?
Price penetration is a strategy where a business sets a low initial price for its product to attract customers and gain a share in the market. The idea is to tempt people with a great deal, driving them to choose your product over competitors.
Even though this may mean making less profit at first, the goal is to build a loyal customer base and increase sales in the long run.
For example, you may have seen stores offering free samples of a new energy drink or perhaps some cookies. This is done to get people hooked on your product, with the hope that they’ll return, this time to buy even when the price goes up later.
Penetration pricing isn’t a new concept. In fact, brands like Starbucks, Walmart, Netflix, and Hyundai have used penetration pricing to kickoff in the market and get hold of new customers by offering them excellent value.
Penetration Price Or Price Skimming: Are they Same?
Penetration Pricing and Price Skimming may seem similar, and they’re the most common techniques used when launching or introducing new products. However, they can’t be used interchangeably.
Understanding the difference between these approaches is crucial for selecting a strategy that optimises profits and minimises competition.
As for Penetration pricing, it involves initially offering new products at low prices to set up a customer base. This may cost you lower profits in the short-term due to slimmer profit margins, but contributes to increased sales volumes. As demand grows, you can gradually raise the price.
On the other hand, Price Skimming is more suitable when you already have interested customers. Unlike price penetration, you start with a high price to maximise immediate profits, subsequently reducing it to attract a broader customer base.
So, what happens when you decide to go with these approaches?
Well, both of them are temporary and have different outcomes. A skimming strategy will expose you to competitors undercutting your prices. With penetration pricing, you position yourself as a retailer offering similar products at a more affordable rate than your rivals.
5 Reasons to Choose Penetration Pricing
Sacrificing initial profits to garner a steady, loyal customer base is the essence of penetration pricing, but, there’s more to it. Here are some reasons why choosing penetration pricing can be a decision worth making.
1. Capturing Market Share
When you’re starting out fresh, you need to let the customers know why you’re shopping from you would be an experience worth having. Of course, they already buy from your competitors so a few offers aren’t going to cut it.
Lower prices are a convincing factor to drive customers and gradually make yourself their go-to store. This is how you’ll compete with your competitors and
Furthermore, penetration pricing works exceptionally well if your target customers are price sensitive, i.e. if your products are similar to those of your competitors, then price is the only differentiator.
This is not only Law of demand, but a natural response of buyers to lowered prices. Offering more value for less makes customers buy your products.
Let’s say you sell wholesale food brands like Healtheries milk biscuits and more. If your competitors sell the same product, getting customers to buy from you will be a challenge. In this case, you can come up with a cost-saving bundle or a BOGO offer to make yourself noticeable.
A market penetration strategy would be a great way to introduce such products to the market.
2. Building a Loyal Customer Base
No one likes to miss out on a good bargain. As long as you sell at a value price and forge trust with your customers, you’re sure to get a consistent customer base.
Price penetration makes way for brand loyalty, converting initial buyers into brand advocates who may attract more customers through word of mouth techniques.
3. Faster Results
It may take months or years to expand your brand if you’re selling at prices that are dominating the market. When you’re starting big, selling products at eye-grabbing prices will attract customers at a faster rate.
During this time, you can plan out product expansion, gradually increase prices, and make improvements to your business.
4. Pulling Customers from your Competitors
Stepping into a highly competitive retail market demands strategy, and penetration pricing can help you in just that.
A slightly lower priced product gains more attention than the other options. Customers, ever watchful for value, may drive towards the most cost-effective solution, enhancing your market share.
5. Long-Term Viability
The initial sacrifice of profit margin through penetration pricing is a calculated investment. The strategy’s genius lies in its ability to lay the groundwork for sustained gains.
As your customer base flourishes and demand rises, gradual price adjustments can be executed without compromising your competitive edge.
Advantages of Penetration Pricing
- More clients: Customers will be drawn away from your competition if your product is of great quality and launched efficiently.
- Market dominance: The more your market share, the more of a market leader you become.
- Increased Brand loyalty: Through penetration, you may create a devoted consumer base. A great price draws customers in, and if your product is good, they will continue to buy even if the price rises.
- Customer Loyalty: Offering a low price can make people like your brand a lot. If they like what they buy, they might stick around even if the price goes up.
- Less Competition: Selling at a low price can make it tough for others to enter the market. They might not be able to afford selling at that price.
- Spending Less: Selling a lot at a low price can actually save you money. You can buy things you need in big amounts and get discounts from wholesale food suppliers. Likewise, an attractive price will generate more sales than spending thousands of dollars on marketing your products.
How to Make Penetration Pricing Work
There are some risks associated with penetration pricing, but you can offset them with a flexible and thought-out strategy.
- Start-up Costs: Penetration pricing needs money for making, distributing, and marketing your product. You might not make big profits at first, but it can pay off later.
- Compromised Image: Going for a low price might make people doubt your product quality. If you want to be known for top quality, starting with a low price could backfire. However, if you could assure customers that your quality is above par, you can tackle this disadvantage.
- Price Wars Danger: If a competitor lowers their price, you might feel you have to do the same to keep up. But then they might lower theirs again, and it becomes a never-ending loop. Make sure to always compete on quality, and only on price. Keep your marketing game one step ahead of your competitors. You can also introduce product bundles or loyalty programs.
Will Penetration Pricing Work For You?
Penetration pricing works wonders for gaining traction with a new product. You will gain market share and attract new clients, but keep in mind that this is just temporary. The idea is to position oneself as a market leader while prices steadily rise.
Retailers and brands that employ penetration pricing must have a long-term strategy in place to generate loyalty and keep customers satisfied. Otherwise, when the next sale comes around, they may switch brands.
A penetration pricing plan will keep you competitive as long as you can demonstrate that your brand is worth the additional money.
To make the most of penetration pricing, consider reliable wholesale food suppliers that can provide premium quality products at competitive prices.
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