The Pitfalls of Penetration Pricing
Businesses have various options when it comes to pricing strategies, but not all are ideal — especially in this era of inflation and supply chain issues.
Penetration pricing is one that people may default to in this current economy, but it may not be the best strategy. Here’s why — including the pros and the cons.
What is Penetration Pricing?
Penetration pricing is a marketing strategy in which a company’s new products or services are offered at a lower price during their initial offering in order to:
- Make a wide number of customers aware of a new product
- Entice customers to try the new product or service
- Penetrate the market and build market share
- Attract customers away from competitors
- Keep new customers once prices rise back to normal levels
An example of penetration pricing in action would be a Software as a Service (SaaS) product offering one month free for a subscription-based service, or a company launching a buy-one-get-one-free (BOGO) campaign to attract customers to a new online store or website.
What Are the Benefits of Penetration Pricing?
Here are some of the biggest benefits of penetration pricing:
- Increase market share: A new product at a lower price can help new companies enter the market and increase market share quickly.
- Create demand: This pricing strategy can also create demand for the new product quickly. Demand equals an uptick in sales volume.
- Outpace the competition: Not only can you draw customers away from competitors, penetration pricing can also help drive competitors out of the market.
Penetration pricing can also increase goodwill; customers that are able to find a new product or service at a bargain price are more likely to return to the company in the future.
But…What Are the Drawbacks?
While this pricing strategy may help businesses acquire a lot of customers and decent sales volume initially, companies that employ it will not only need a lot of customers but a lot of loyal customers, in order to ensure it’s successful.
Why? Because when prices do eventually increase in the future, customer loyalty will be tested. Customers may choose the business’s new offering initially, but switch to a competitor once prices go up.
This means that an increase in sales volume may not necessarily lead to an increase in profits if prices must remain low to keep new customers. Furthermore, if the competition also lowers their prices, companies might find themselves in a price war. This can lead not only to lower prices but also lower profits for an extended period of time.
And these are just the general drawbacks.
In this current post-COVID era, suppliers are grappling with supply shortages and inflation is putting pressure on companies operating across many industries.
In such an inflation environment, businesses must act with more speed, promptly refining their pricing strategies — meaning penetration pricing might not be the best route to take if businesses wish to remain agile and competitive.
How PO&M Software Can Facilitate Your Pricing Strategy
Your organization needs to be able to compose a digital selling pathway based on your unique business needs. A pricing solution like PO&M software that sits at the intersection of product, price, and place can:
- Enable your business to define, implement, and optimize its selling efforts
- Power successful omnichannel commerce strategies
- Increase efficiency and collaboration across sales, pricing, and eCommerce teams
- Lessen the impact of supply chain issues
- Make your organization more nimble and agile
- Turn inflation into an opportunity for strategic price adjustments
Considering your pricing strategy carefully in the current economy can help your business choose the best path to profitability and competitive advantage — and looking to PO&M software can help.
Companies that have the right tools and systems in place — like AI-powered solutions — are better able to make well-informed decisions in a timely manner. This ensures they’re not only capable of executing change faster, but that they perform better.
The PROS Platform offers pricing teams the means to effectively manage dynamic price strategies from a centralized hub. This means your business will be able to analyze, optimize, and deliver tailored pricing for every customer, through every sales channel, in real-time.
For more information, speak with a PROS representative.