In the simplest of terms, price penetration is when a retailer offers a new product at a lower price at first to grab the attention of consumers. This helps stores get customers through the door quicker and can attract a lot of initial attention. Of course, it’s a bit more involved than that but the right strategy can generate huge returns for retailers.
What’s the Difference Between Price Penetration & Price Skimming?
Before diving too deep into the details, it’s first important to understand the difference between price penetration and price skimming. Although they’re both ways to introduce new products to maximise profits, penetration pricing is when a retailer sells products at lower prices to first build a customer base, resulting in lower profit margins but heavier sales volumes that balance out the lower pricing strategy. As the increase in demand for the product rises, your business then raises the price accordingly.
Price skimming is best used when your business has already piqued the interest of current or potential customers for a particular product. It entails charging a higher price at the very outset to maximise the profit potential, then slowly lowering the price to bring in added customers.
What Are the Goals of Penetration Pricing?
With the current cost of living crisis and supply chain challenges, consumers are looking to make every penny count, while retailers will want to build and maintain their customer base.There are several advantages to penetration pricing including:
- Building Brand Loyalty: Attracting new customers and keeping current ones is all about building brand loyalty. Your business can capitalise on penetration pricing by offering loyalty programs with the first purchase of a product. Additionally, by providing rewards and discounts you can offset product prices without lessening their value, since it will inspire consumers to spend more, giving you more returns over time.
- Capturing Market Share: According to the Law of Demand theory, penetration pricing helps retailers capture more of a market share by securing more customers and making them think they’re getting more for less. It’s a great way to introduce new products in an already saturated marketplace with similar products to the one your business is launching.
- Drawing Customers Away from the Competition: Another added advantage of penetration pricing is that it helps your retail establishment remain competitive. With lower prices, your business can draw attention away from competitors to your brand, which is offering the same product at a higher price. Your company can capture the consumer’s attention, then entice them with some of the deals and discounts mentioned above to further build a loyal customer base.
The Advantages & Disadvantages of Penetration Pricing
- Attracting more customers
- Decreasing the competition
- Lowering costs
- Boosting brand loyalty
- Enhancing market leadership
- Getting into possible price wars with competitors
- Upfront costs
- Poor brand perception (being seen as a less premium brand due to offering lower prices)
What are the Keys to Implementing a Successful Price Penetration Strategy?
Avoiding Price Wars
If you do find your business’s brand involved in price wars with competitors, you can avoid falling into such a trap by being upfront about your intentions and offering to match competitor prices or revealing your product’s cost advantage. It’s also important to convey the quality of your product and how it’s different than that of competitors. This often involves lauding the lesser-known features of your product that sets it apart. You can also offer bundled pricing, loyalty programs, and promotions.
Building Long-Term Loyalty
Once your business has attracted the attention of customers and they’ve purchased your new product, it’s important to start strengthening your relationship with them and building brand loyalty. This means providing the best customer service possible, in addition to segmenting and hyper-personalising customer experiences. Also, enable customers to leave feedback, whether it be positive or negative, and respond to that feedback. Lastly, promote shared values to forge a personal connection with your customer base.
Making Certain There’s High Demand for Your Product
Ensuring there’s a high demand for the product you offer is key for a successful penetration pricing campaign. This means that your prices aren’t perceived as cheap but simply lower in terms of the value in the overall market. This means that price penetration strategies will always work best in markets that are price sensitive. To have a successful price penetration campaign, your business will have to sacrifice profitability at the forefront, so it’s essential that the product you’re offering is in high demand to make up for any financial losses at the outset of your launch.
Contact us today for a no-obligation demonstration
If you want to launch a new price penetration strategy, the team from Eurostop can provide you with all the tools you need to make it a success. We offer today’s most innovative EPOS systems, stock control software, mobile POS solutions, and more.
Contact us today for a no-obligation demonstration or call +44 (0) 208 991 2700.