Using Penetration Pricing for Small Businesses

Penetration pricing is a marketing strategy which involves businesses pulling in customers through offering a product or service at a temporarily low price at its launch. This low price assists in helping the new product or service effectively penetrate the market and attract customers.

In this post we’ll take you through what you should consider in terms of the pros and cons of using penetration pricing as a small business.

What is penetration pricing?

Penetration pricing is a strategy for enticing customers to try a new product or service for an initially very competitive price. The goal is to keep customers onboard even after this initial price rises. Examples include an online subscription service offering the first month free, or a cosmetic store offering a discount on a first order.

Penetration pricing can be a successful marketing strategy when used effectively and can often lead to a boost in market share and sales volume. However, the success of the strategy is measured by how many customers stick around once the low-cost incentive has gone. Indeed, often customers take advantage of the low prices and then opt out once costs increase up to normal levels.

Advantages of penetration pricing

Market penetration pricing can be an effective way to gain market share. Let’s explore some of the pros of the marketing strategy:

• Rapid adoption - A low price will entice large volumes of customers as it comes at a low financial risk.

• Large sales volume offsets low price - While in general lower prices lead to lower revenues, with penetration pricing the sheer increase in sales volume can make up for lower mark-ups, making it a potentially low risk strategy for small businesses.

• Can help build a good reputation - At the end of the day, customers are attracted to good value deals. Through starting out with a low price, new businesses can create a good relationship with customers who value the exchange of a quality service for a relatively low-cost transaction. Plus, customers who keep a keen eye on the purse strings will be won over by the strategy and more likely to tell their friends and family about it.

• Decreases competition - Coming out with comparatively low prices can catch competitors off-guard, making you the clear choice for potential customers. This means that during the launch period you can effectively diminish the threat of competition.

• Can lead to greater cost efficiency - Managing penetration pricing requires attentive and informed budgeting and financial forecasting to pull off. Doing this effectively may mean you discover other ways to keep costs low and maximise profits going forward.

Disadvantages of penetration pricing 

No marketing strategy is devoid of certain disadvantages. Below are some of the main drawbacks of using penetration pricing:

• Reduce customer loyalty - Penetration pricing can lead to greater customer turnover as some come onboard simply to take advantage of the low prices and opt out as soon as they increase. While a certain degree of bargain hunting from customers is inevitable, you can keep customer churn to a minimum by offering the best possible service so that users feel it’s worth paying the elevated price.

• Can tarnish reputation- While many customers value good deals, others may view low prices as suspicious or indicative of poor quality. Ensuring your business’s branding and social media presence is reflective of quality and reliability can help prevent this.

• Narrow margins - Naturally, having low prices entails you need large sales volumes to break even or make a profit. If this doesn’t happen, then you might find yourself in financial difficulty. Testing the waters before launching can help reduce this risk.

• Can incite completion - While penetration pricing can make your business more competitive, it may have the reverse effect of encouraging your competitors to adopt a similar strategy, effectively meaning you would lose your competitive edge and no longer stand out in the crowd.

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