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As a business owner or manager, you are always looking to develop new products and programs that will grow your business. Unfortunately cutting through the competitive clutter can at times be extremely difficult.
We all want to increase market share. It is how we stay in business by encouraging our existing customers to buy more and new customers to try our products and services.
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Penetration Pricing Increases Sales Quickly
Penetration pricing is a pricing strategy that is mainly designed to increase market share quickly. It is an easy strategy to understand. You introduce a product with a low introductory price to get people to switch to you. Thereby achieving an initial increased market share and sales volume.
Depending on how low cost you go might also discourage the competition from entering the field right away. So, when developing a new product that you expect the demand to be high this strategy can be very effective. This is typical in the high tech product arena. Many of the products can be easily copied. So you enter the market as the low cost market standard gaining large sales volume and market share before the others can enter the market.
One note of caution, if you really do think it will be a high demand product, make sure you have production and inventory capabilities before you launch this strategy.
If the demand is high, you may ultimately keep the product at a lower cost (but not necessarily as low) by negotiating a lower wholesale cost from your supplier or manufacturer. In addition, if you are consistently showcasing the product your manufacturer or wholesaler may provide you with co-op funds to help with your advertising expenses.
Loss Leader Entices Customers to Buy Now
You will also see this pricing strategy used regularly by retailers to get you into their brick
and mortar locations. Think loss leader sellers. The product is sold at such a low price that it entices customers to visit your location. And in many cases your profit margins are minimal. In my opinion, you don’t necessarily want to sell at a loss, but sometimes you may feel the benefits outweigh the actual loss.
The thought process is that the loss leader product will bring a customer into the store and other items will be so enticing that they will purchase more profitable items as well. This strategy works to bring in new customers as well as bringing your existing or loyal customers in more often.
Loss Leader Product is Strategically Positioned
Next time you are in a retailer that has a loss leader product take a look at where it is placed. It will be the item that they are screaming in ads or in-store displays “lowest price anywhere”. The placement of the product is strategic so you will pass by other more profitable items on the way to the loss leader. It is very rare that the loss leader product will be positioned in the front of the store. Typically they are at least half way towards the back of the store. The positioning gives you plenty of time to see other more profitable products you may purchase.
Restaurants are another prime example of successfully utilizing the penetration pricing
strategy. They offer a new menu item or 3-course meal menu at a very special low price, which brings customers (new and loyal) to the restaurant. However, after reviewing the menu one or more of the party orders a different item on the menu at regular price and possibly an expensive bottle of wine.
Loss Leaders Can Encourage Profitable Sales
In Miami the months of August and September are called Miami Spice months. Many of the area’s best restaurants offer a special 3-course menu (with 2-3 choices available for each course) for just $39.00. In Miami that’s a great deal. I have experienced many great meals on through the specials. But at the same time, I have also decided not to buy the special and go with a regular menu item. And, the promotion has made it enticing for me to try new restaurants that have now become new favorites frequented not in the “spice season.” Obviously a winning combination promotion.
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Penetration Pricing Enhances Sales Cycle
As the example shows this strategy typically is a short one that can be used at various times within your sales cycle. Keep in mind that most loss leader product pricing is for a limited time. As a matter of fact, once most companies have seen a large increase in sales volume they will increase the pricing to a more profitable level. This price increase can be gradual or all at once. This aspect of the strategy must be done with care. You don’t want to alienate your new or loyal customers.
Many companies find the penetration pricing strategy to be advantageous on a number of levels. And it is particularly effective when used as part of your overall sales promotional program.
Customer Come Back for More
For example, if a consumer feels that you have good pricing because of a recent loss leader promotion then they may come back to catch new deals. That is the ultimate goal of any successful sales promotion program an increase in sales and market share.
So having another promotion in effect in conjunction with the loss leader is recommended. Of if a promotion that can be used on a subsequent visit. If it interests them then you may be well on your way to creating a new loyal customer. One example is to provide them with a discount on their next purchase when they buy the loss leader.
I was in a hobby style store recently purchasing a gift for my nephew. Of course while I was in the store I ended up finding some frames that were on sale. It was a great price that I couldn’t pass up. As a matter of fact, it might have been the loss leader as they had been advertised. At check out I was presented with a coupon for 50% off one item on my next visit within the next 30 days.
Combine with a Push-Pull Promotion
Now, I don’t usually shop there but now I may very well go back to use the 50% off coupon. This sales promotion strategy may have just worked on me!
So using one promotion to draw customers in and another to bring them back is a great push-pull promotion strategy.
In addition, a low cost promotion typically encourages word of mouth advertising. If it was
a great deal they will encourage their friends and family to switch as a result of their low cost experience.
And that leads us to one of the potential disadvantages of utilizing this strategy consistently. We’ve discussed this previously that you need to be careful regarding your brand identity. Do you want to be known as the low cost company? Is the additional market share worth your brand identity?
That’s why we recommend that you use this strategy in conjunction with other non-penetration pricing sales promotions.
Low Cost Price War Threat a Disadvantage
Another disadvantage to the penetration pricing strategy is the possibility of creating a price war with your competitors. You introduce a product with a low price and then they offer a similar product at an even lower price. And this can go on and on as each company tries to steal customers from the other. Where do you stop?
Or what if you beef up inventory and production it’s not the sales leader you thought it would be. You are stuck with inventory and low sales. And, if you price it too cheaply your customers could perceive the product itself as inferior. So you also hurt your brand because the quality is perceived as bad.
Another potential disadvantage to this strategy is that your customers may expect for the pricing to remain low forever. And when it is raised they feel cheated. Some may even feel as if it was a “bait and switch” strategy from the beginning.
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Brand Identity Damage Possible
A serious potential drawback of any pricing penetration promotion can also be the type of customer it attracts. Offering a low price option regularly may not attract a loyal customer but a customer that shops on price exclusively. The bargain customer is not a loyal customer and will leave as soon as you start to raise prices.
No matter what you do, you will get some of these customers for the short term with this strategy. The balancing act is to limit the bargain seeker and have other products and promotions in place to win more of your wanted target audience.