What is Penetration Pricing Strategy? Top Things to Know About the Approach

Are you having difficulties setting the right price for a new product? Penetration pricing strategy is one of the right approaches to determine the right price for a product to attract customers. What is it exactly? To understand penetration pricing strategy, you should continue reading this.

What is penetration pricing?

Penetration pricing strategy is one of the most popular pricing strategies in the business world. It aims to maximize profits on newly launched products or services by selling them at a low introductory price. Through this approach, gaining customer attention and penetrating the market become attainable.

Benefits of Penetration Pricing Strategy

  • It helps achieve a large number of initial sales for new products or services.
  • It allows the business to penetrate the market through quick sales.
  • It allows the business to hold a share market within a competitive environment.
  • It creates mass demand by selling products or services at low prices.
  • Due to the mass demand and production, the business can launch itself as a brand leader.
  • It creates brand loyalty.

Penetration pricing strategy is also a great marketing campaign as it helps gain customer attention even though the product or service is has been newly released. However, in this strategy, there are also disadvantages when using a penetration pricing strategy.

Disadvantages of Penetration Pricing Strategy

  • Lowering the price may not be able to cover up the development expenses.
  • If the new products or services (offered at low prices) do not sell quickly, it will cause lock-up or locking of funds to preserve liquidity and maintain stability in the market.
  • If the pricing tactic isn’t going in the right direction, the quality of the product may also be affected.
  • It won’t be easy to raise the price later.
  • If the product is perishable and will not sell within its expiration, the business owner or marketer may experience a huge loss.

Is Penetration Pricing Strategy the right pricing approach for your business?

Although penetration pricing strategy may seem the best approach to capture consumers’ brand loyalty, this approach is not the best strategy for every business. The pricing strategy is the best approach for new entrants in a highly competitive market. It will create mass-market appeal. However, there are also limitations that you need to take note of. For instance, the penetration pricing strategy is not ideal in the food industry. Remember that the said strategy is a short-term approach. If you had mass production on products consumable within a short period, it may cause a huge loss; however, it depends on the sales. If the sales are going in the right direction, it will be a good start; otherwise, you’ll have to start all over again.

There are other pricing approaches that you may want to consider, including price skimming. Price skimming is the exact opposite of the penetration pricing strategy. In this approach, the marketer will introduce its new product or service at a high price and reduce its price over time.

So, which approach is best for your business?