Advantages and Disadvantages of Penetration Pricing

Used astutely, penetration pricing has many benefits. There are, however, potential pitfalls you need to avoid. With that in mind, here is a straightforward guide to the advantages and disadvantages of penetration pricing.

What is penetration pricing?

In brief, penetration pricing is the strategy of setting a low price for a product or service when it is initially placed on the market. Consumers (and marketers) often refer to it as an introductory special offer.

Penetration pricing advantages

Penetration pricing has helped to produce some of the world’s biggest brand success stories. Here are the main benefits of penetration pricing.

Win customers from competitors

One of the major aims of penetration pricing is to encourage people who already buy a similar product or service to try your alternative instead.

Encourage new customers to try your product or service

Penetration pricing can help encourage new customers to the market for your product or service. These are typically people who were interested in that area but not convinced enough to pay the regular price. Offering them a discount reduces their risk. It therefore makes it easier for them to justify trying it out.

Limit competition

Penetration pricing can help to deter other competitors from entering the market during the promotional period. It may even encourage some of your established competitors to leave the market. 

Become a market leader

The benefits of being a market leader go way beyond just having a sizable market share. You become one of the driving forces in your sector. You also gain a high level of credibility and trust.

Benefit from economies of scale

With penetration pricing, you generally aim to have a high inventory (in expectation of a high inventory turnover). This means you can potentially benefit from economies of scale.

Build relationships with key partners

Brands that generate high sales are very popular with their key partners such as wholesalers and retailers. This means that penetration pricing can allow you to build strong relationships with them too.

Encourage organic marketing

When people find a great deal, they often want to share it. This can help you to generate organic or viral marketing. It can also get you increased press coverage.

Start to build brand loyalty

Penetration pricing itself will not build brand loyalty. It will, however, potentially allow you to start building relationships with customers. This is the starting point for building true brand loyalty.

Disadvantages of penetration pricing

Penetration pricing is not a guarantee of success. It has several potential disadvantages. Fortunately, these can all be managed with an effective penetration pricing strategy.

Requires significant up-front investment

You cannot get around this but you can manage it. For example, if you’re anticipating that your penetration pricing strategy will prompt high demand, you can place bulk orders. You can then use your purchasing power to negotiate the best possible deals with your suppliers.

Can be relatively high risk

Anything that requires a large upfront investment in the hope of longer-term profits is a relatively high-risk strategy. You cannot avoid this reality. You can, however, mitigate it with careful management.

Be very careful not to overstretch yourself. In particular, remember that penetration pricing strategies tend to work best when supported by great marketing. They also require you to deliver on customer experience.

Can trigger a race to the bottom

Your competitors may elect to retaliate by cutting their own prices. If they do, then you will either have to abandon your penetration pricing strategy or cut your own price. Your competitor may cut their price again and so on. This is not sustainable. 

The way to mitigate this risk is to make it clear that the price offer is time-limited. Choose your timeframe carefully. It needs to be long enough for you to make an impact but short enough to discourage your competitors from retaliating with price cuts of their own.

Can set unrealistic pricing expectations

Modern customers are used to seeing businesses find ways to extend purportedly special offers indefinitely. This, of course, leads to them ceasing to be special. Some customers may therefore assume that your promotional price is actually your regular price (or very close to it). 

The way to mitigate this risk is to communicate the time-limited aspect very clearly. Then you must stick to it. Only extend the promotion if there is clearly a compelling reason to do so. This should really be a factor outside your control such as adverse weather leading to supply-side disruptions. Once you set the new date, again, you must stick to it.

Can encourage an influx of customers who will not be loyal to the brand

If you implement a penetration pricing strategy, it’s virtually inevitable that some of the people who buy your product or service will be straightforward bargain hunters. They will only buy from you again if you continue to offer the lowest price. Overall value and great customer service will not be enough to win them over.

The way to mitigate this risk is to make sure that your penetration pricing strategy at least covers its costs. Ideally, it will make a profit - just a smaller one than usual.

Can lead to poor customer experiences and hence negative publicity

If you put too high a percentage of your resources into supporting penetration pricing, then you’ll have to make compromises elsewhere. This could lead to a poor customer experience and negative publicity. This could potentially undo all the benefits that could have been achieved by your penetration pricing strategy.

The way to mitigate this risk is to be very careful to avoid overstretching yourself. Think about what high demand will mean for your business overall. Make sure that you can still deliver excellent customer service.

Can create the impression that you are a low-quality brand

Most customers are well aware that there is generally a strong link between quality and price. Even with a penetration pricing strategy, if you set your price too low, it may make consumers wary. The way to mitigate this risk is to keep your price high enough to be credible. You also need to be very clear that it is a short-term promotion.

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