What Is Penetration Pricing?
One of the first things almost every business struggles with is acquisition and gaining traction for their product. Some try to practice the whole “Build it and they will come” philosophy, others attempt gorilla marketing and force-feed the market their product. And some try to refine their content strategies. The list goes on. But one strategy that has seen the most success, at least initially, is penetration pricing.
So, What is Penetration Pricing?
You can assume a bit by looking at the name. One of our partners discussed key strategies for “pricing to scale” in a recent Entrepreneur article. Here’s a definition for it: “Penetration pricing refers to a strategy in which the price of a product is set low following its introduction in the market to drive early adoption and identify a core segment. Once the product has found a market segment, the business raises prices to more reasonable and expected level.” And here are some initial benefits.
Increase Sales Volume
Whether you’re new to the market or attacking a new segment, an increase in sales volume typically results in gaining more market share which is a goal all of us have. Lower prices typically allow you to bring customers over from competitors if you have comparable or better offerings. As you already know, consumers don’t want to burn a hole through their wallets to get a good product.
Utilizing the new clients at the low price point as word of mouth advocates, you can quickly gain traction as they have a feeling they got a great deal. But for this to ever happen, your product must deliver those expectations.
Lower Production Costs
As a result of increased sales volume, you can begin to increase your bottom line due to the economies of scale. This will differ depending on your product. If it’s hardware based on fixed costs or software driven, you can have a cost of a team and increase margins by having more sales for the same efforts.
Wider Audience
With a lower price, you will attract different audiences for different reasons. Whether you’re a new product or company testing a new segment, it is important to identify why different audiences are coming. Is this an untapped market? Or did they come just for the price but have a misunderstanding of the use of the product? Don’t be misguided into believing new customers are here to stay. Not all of them will retain.
It’s critical to remember that this is a short-term strategy. One that can be reused but should not be executed with the expectation of maintaining the reduced-price structure for a prolonged amount of time. In other words, don’t attach yourself to it.
Slowly, you have to raise prices as you validate the benefits and value your product brings to a specific segment or else you will continue to drive a loss. Lower volumes with lower pricing always result in lower prices. As you increase the price, don’t be too surprised if some of the new folks abandoned ship — everyone comes for a different reason and you will never have 100 percent retention of the new segment. And that’s OK.
