Market Penetration pricing: how does it work?
Market penetration pricing is defined as offering a product or service at a lower cost to achieve greater market share in a particular market segment. The seller may sell the product at a loss to gain market share from established players in the market.
It is a very common strategy that is adopted by new incumbents in a market. There are dual advantages associated with market penetration pricing. Number one is that brands can market their products at lower costs as the sale of products is a marketing strategy.
Number two is that companies can attract customers that may at first be hesitant to try the new product. Company is then able to build on gaining the market share and can then offer high quality products at a higher price point which can make up for loss associated with using the market penetration pricing.
How does market penetration pricing work?
For a company to form an effective market penetration pricing strategy, it must have complete details about its competitors. As the company plans to be competitive on pricing, it must have knowledge about what its targeted customers are being charged by the competition.
Critical factors that should be kept in mind when using the market penetration pricing strategy
There are three critical factors that must be kept in mind when a company adopts the market penetration pricing strategy. All three of these critical factors are shown in the figure 1 below:
Figure 1: The three critical factors impacting the market penetration pricing
The three most critical factors every company thinking of adopting the market penetration pricing should keep in mind are the product cycle of the targeted market; the consumer that the company is targeting and finally the distribution size or scale of the product. All three of these factors are explained in great deal below:
The product life cycle
The product life cycle is a very important point that the company must keep in mind when using the market penetration pricing strategy. If the company is entering a market whose products are matured, like fans, it is probably not the right strategy for the company to adopt.
If the company is launching a new product, the market penetration pricing strategy is a great strategy.
It is very important that the company knows the habits of the consumer base that it is targeting. For example, market penetration pricing would not be the right strategy to use when targeting a consumer base for whom the price point is not important.
These are the rich class consumer. They are looking for high quality and expensive products. But it is a great strategy to use when targeting consumers who belong to the middle or lower-middle class.
The distribution and size of the operation are very important. The company must very strategically pick the optimal size and distribution. It not only helps in reducing extra costs but also allows for operations to become profitable over time.
If a company insists on both size and distribution, it is very likely that the company will run into trouble and the whole operation would become unprofitable. This will lead the company into financial troubles. So, the company should focus on one of these operation.
Market pricing penetration is a great strategy for new companies when they are entering a new market. This allows them to gain market share and scale of economics.