A market penetration price is a low price applied temporarily to simplify the company’s entry into a brand new market in order to encourage demand and differentiate itself from its competitors at that time.
The market penetration price strategy is generally considered to be the opposite of skimming.
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.