How market penetration pricing helps your business

Have you ever noticed those ridiculously cheap priced specials for milk, bread, 1 litre coca cola? Fly free, or 2 for 1 offers, or buy one get one free. Its a one off bargain to attract new customers into your business to experience your shopping concept. Its risky but can lead to a huge market share gain. People will usually buy more of your special. Customers buy other products and services too. Market penetration pricing gets customer attention and generates additional sales. It has elasticity of demand as customers are price sensitive.

Creating a successful pricing strategy for business growth takes careful consideration. You need to understand your market, your product or service, your strategy and objectives and your competition.

It really helps if you have done some research before you rush out with an attention grabbing strategy. The Business Minder can do some competitive intelligence research and prepare a competitive analysis and a marketing plan to help you gain a better understanding for a competitive strategy. To get the best result with your pricing you will need to

• predict how your competition will react to your pricing strategy

• have a strong marketing mix product or service strategy

• have developed a unique product or service differentiation from your competitors

• ensure that your product or service positioning is 'right' for your targeted market

Penetration Pricing

This is used when introducing new products to the market or when trying to gain significant market share. The concept is that a new low, introductory price will encourage customers to buy. Prices are low to attract attention and buyers. Once the product/service is established, the price may move to a higher level. It should be used only if you feel you need a low price to attract attention from the market and if you want to hold off or stall competitors from entering the market (they might be scared off at the low margins).

Why use it?

• Rapid - you can gain market share quickly by pricing low and surprising your competition

• New startup - helpful strategy if you expect strong competition very soon after opening

• Goodwill - customers will spread the news of it by word of mouth

• Cost awareness - when you price low, your business will need to be as efficient as possible

• Brick wall - going low with pricing can deter competitors from matching the offering

• Increase flow - achieve fast turnover of stock and build a following among distributors and retailers

​The down side

Low prices may attract "switchers" while the price is low but won't build any brand loyalty as switchers will leave again. The low initial price may build price expectations and it may be difficult, later, to raise prices without causing a market reaction. If the low price becomes part of your brand image, changing price will disturb that image in the customer's mind.

Cheap pricing means low profit. To be sustainable in the long term you need to have economy of scale or large numbers of buyers. Therefore, most strategies using market penetration pricing are based on fast short term gains.

Combat Competitors

Aggressive businesses often use market penetration pricing to defend against hungry competitors or to combat the efforts of competitors. As the first mover on a product, you can use low up front prices to force competitors that follow you to focus on alternative strategies with higher prices. If you come into a market after competitors, market penetration pricing can enable you to steal customers and put competitors on the defensive.

Though it may be risky to assume the strategy will always succeed, market penetration pricing can lead to cost advantages for your business, if everything goes well. By offering low prices and generating a high volume of sales, you can afford to buy larger quantities from suppliers. This leads to bulk discounts and lower costs per unit for you. This enables you to earn some profit even at low prices. An alternative, riskier line of thinking is to buy in bulk to get the discounts and then use penetration pricing to ensure you sell through your inventory. The Business Minder operates in SE Asia with clients in Singapore, Malaysia and Bali, Indonesia.