In the movie Crazy, Stupid, Love, there’s an iconic scene where cool-guy Jacob (Ryan Gosling) is teaching 40-something dad Cal (Steve Carell) how to reinvent his personal style and get back in the dating game. At one point in the scene, Jacob takes Cal’s old sneakers and chucks them off a balcony.
“Are you in a fraternity?” he asks. “Are you Steve Jobs? Are you the billionaire owner of Apple Computers? … Well, in that case, you’ve got no right to wear (those) sneakers ever.”
Jacob knew that a first impression was the most important thing for Cal to focus on if he hoped to get the attention of potential dates. And while the world of ecommerce never plays out quite like a rom-com, there’s something brands can learn from this message about the importance of capturing demand with a great first impression.
Much like in the world of dating, when bringing a new product or service to market, you need to stand out, grab customers’ attention, and give them a reason to try out what you have to offer. The pricing strategy you choose can play a huge role in this. One effective strategy for cutting through the noise is known as penetration pricing strategy, which involves providing your new offering at a price too good for consumers to pass up.
In this article, we’ll take a look at penetration pricing strategy, when it makes sense to use it, some potential drawbacks to consider, and how (if deployed effectively) it can help you make crazy, stupid sales.
What is a penetration pricing strategy?
A penetration pricing strategy is the tactic of launching a new product or service at a low introductory price with the intention of raising the price later. The initial price may provide a razor-thin profit margin, or it may even mean you operate at a loss. The goal is to secure enough of the market that customers will stick with your offering once you raise the price to a more sustainable level.
Penetration pricing is similar to economy pricing in that both use low prices to attract customers, but it differs in that economy pricing is meant to be permanent, whereas penetration pricing is temporary and may not make any profit at all. Penetration pricing may also be thought of as the opposite of price skimming—the strategy of launching with high prices, and then lowering them over time.
Generally speaking, penetration pricing is best applied to consumable items or ongoing services. You wouldn’t want to offer a low introductory price on a product that consumers will only need to buy once. The strategy relies on having customers come back for more once you’ve raised the prices.
Pros of penetration pricing
Using a penetration pricing strategy gives you the potential to attract a lot of customers, increase your market share, and create brand loyalty.
New products and services are inherently exciting. When consumers see that a new offering is also cheaper than the competition, it makes for an extremely compelling offer. If they can save money while trying out something new, why wouldn’t they give it a try? This offers brands a foot in the door, giving them the chance to prove themselves, encourage shoppers to switch from a competitor, and turn first-time buyers into long-term customers.
Increase market share
By attracting large numbers of customers, penetration pricing can help brands increase their market share. This in turn helps to improve public perception and gain the attraction of even more customers as a result. It’s a compounding effect that if pulled off well, can really give new products the boost they need to succeed.
Create brand loyalty
Penetration pricing offers consumers a reason to try a new product or service that they may have otherwise overlooked. Not only does this provide brands with the chance to win over these customers with the quality of their offerings, but it also has the psychological effect of forming habits.
The simple act of purchasing a product one time can make a shopper more likely to purchase it again later by providing “top of mind awareness.” And in crowded markets where little differentiation exists between the products themselves, every little bit of recognition can help to keep customers buying your products instead of the competition’s.
Cons of penetration pricing
The potential rewards of penetration pricing don’t come without drawbacks. It’ll cost you up front, it has the potential to affect your brand perception, and it’s an inherently risky strategy.
Can be costly
To win with a penetration pricing strategy, you have to be in it for the long game (or hoping you’ll get acquired). It’s usually going to cost you up front. You won’t be making as much of a profit margin on each sale as you could with higher prices, and you may even be accepting an overall loss—all for the hope that you’ll make up the difference later.
May affect brand perception
Your hope for penetration pricing would be that the low prices incentivize customers to try your product or service and then fall in love with it. But low prices can sometimes also give the perception of low quality. And since penetration pricing is not the same as offering economy products, you’ll need to be sure you avoid giving off that perception—or people won’t be willing to pay your higher prices later.
Is inherently risky
A penetration pricing strategy relies on raising the prices eventually. And that can be tricky to pull off without upsetting your existing customers. Consider the consistent outrage every time Netflix raises its prices. In Netflix’s case, their penetration pricing strategy worked extremely well. They are not only huge, but they are literally synonymous with digital streaming. So they can afford to have a certain number of upset customers drop their service with each price hike. But not every brand will be that lucky. Weigh the risks carefully before adopting penetration pricing.
Monitor your prices with Prowl
No matter what pricing strategy you use, it’s important to have and enforce a MAP policy to make sure sellers and retailers stick to the prices you prescribe.
Prowl is the most advanced MAP monitoring software available. It crawls every site your SKUs appear on, comparing prices to your pricing policies. When it detects a pricing policy violation, it takes a screenshot of the violation and notifies you. You can also build and customize templated MAP violation messages to streamline MAP enforcement.
Since Prowl crawls everywhere your products appear, it can track both authorized and unauthorized sellers, helping you find new sellers you’d like to partner with or those you need to eliminate.
MAP enforcement is impossible without price monitoring. And price monitoring is impossible at scale without tools like Prowl. Be equipped to attack while running with best-in-class MAP monitoring software.
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