What are the benefits of market penetration pricing?
- Competitor domination: When you take the opportunity to convert so many customers, the competition is usually destabilized and therefore has little time to react.
And to achieve this, a very important step is to monitor the competition’s prices in order to facilitate the decision making in such a competitive environment.
- Economy of scale: This product pricing strategy generates a large volume of sales allowing a company to make economies of scale and lower its marginal rate.
- High inventory turnover: Penetration pricing results in higher inventory turnover, which makes vertical supply chain partners, such as distributors and retailers, happy.
What are the disadvantages of a market penetration price strategy?
- Low consumer loyalty: The penetration pricing strategy typically targets those looking for bargains or those with low customer loyalty. They are likely to switch providers if they find a better deal. Lowering prices, while effective in making a few immediate sales, does not easily engender customer loyalty.
- Deterioration of brand awareness: Low prices are likely to affect brand image, as consumers perceive the brand as cheap or of poor quality.
- Price wars: A policy of market price penetration can lead to price wars. This reduces the profitability of the market, and only companies that are strong enough can withstand a price war – it is usually not the small newcomers that start the war.
How to set the market penetration price ?
1 – Calculate your costs
You have to consider that you have to generate enough income to be able to cover all your costs otherwise you won’t do a good business.
2 – Know who your customers are
Find out everything you can about your customers.
3 – Study what your competitors are doing
How does the competition price their products? This figure is a good starting point for pricing a product.
4 – Use differentiated and odd prices
If your product can be differentiated by additional features, set prices that reflect those individual values.