One of the hardest things for any e-commerce owner, or new e-commerce owner is making people aware of your new products or services.
And once you do manage to make them aware of your product, through say a paid advert on social media or Google ads, how do you encourage them to buy from you? Especially if this is the first time they’ve come across you.
You should know by now, consumers shop around on the internet looking for the best deal. This could be on their smartphone, laptop or even using e-commerce price comparison tools.
What you don’t want is to spend money on facebook ads, only for the consumer to go elsewhere and buy the product somewhere else, for cheaper.
So how do you stop this from happening? How do you make a customer aware of your product and make them willing to purchase from you?
Through a penetration pricing strategy.
In this blog post, we’re going to give you an A-Z understanding of what penetration pricing is, how you should implement it into your pricing strategy and some tips for how to do it well.
- What a market penetration pricing strategy is
- How you, as a small business can use this pricing strategy to improve your profits
- How penetration pricing differs from other pricing strategies such as price skimming, premium pricing and economy pricing
- Examples of small businesses who utilize this strategy
What is penetration pricing
Penetration pricing is an e-commerce marketing strategy small businesses use when they’re highlighting a new product or service or wish to enter a new market. It’s a great strategy to add to your marketing mix if you want to grab a huge portion of the potential customer base early on.
It works in a simple way, where they set their prices lower than their competitors in the hope to increase their market share of customers. Usually, this practice only happens during the initial offering and is meant to allure customers to their store, as opposed to their competitors.
We must reiterate, penetration pricing is not a long term pricing strategy and you should find other pricing strategies that work for your business in the long run. It should only be used when a product is in the introductory stage of its life cycle.
Penetration pricing best practices
You should be aware that when you implement penetration pricing, there are a number of factors you should consider.
First, when you raise your prices (which you should), this should be done slowly and only once you’re already established. Especially in the beginning, you may be selling your items at a loss. However, you should have a plan in place to increase the price incrementally to get back to a point where you have built some loyalty with your customers as well as reached a profitable selling point.
In the above chart, you can as time (X axis) goes on, so does the cost of the product and your profit.
Penetration pricing also works best in certain industries (more on that later), and if used in the wrong industry can often alienate those customers who put pricing at the forefront of their priorities.
When you do offer penetration pricing let your customers know that this is an “Introduction price”.
You should also consider how long of a lifespan a product has. For seasonal products with generally short life spans, penetration pricing probably isn’t the best approach to make. This is because you also have to factor in the other costs such as research, staff, and product development overheads.
For example, you wouldn’t put a low price point on a high-ticket selling item like a car, because the likelihood is that car will last for a number of years, and you’ll have no chance to recoup your lost costs.
Pricing penetration use cases
Pricing penetration in fast moving consumer goods (FMCGs) is a well-adopted approach. Fast moving consumer goods are non-durable goods that sell quickly. Some examples of FMCG are Dog foods, beverages, toiletries, cosmetics or consumer electronics such as memory cards or headphones.
The reason why penetration pricing works so well in these instances is that they are able to be sold in high-volumes. Consumers are generally always in need of these items.
Let’s look at an example. Tails is a brand of tailor-made dog food.
They offer a free two-week trial for only £1.
For many dog owners, this is something they might want to try, especially as they know their dog will be getting tailor-made dog food prepared specifically for their dog’s dietary requirements.
However, if they priced the bag at the original price (which is bespoke to each dog owner depending on what ingredients they need and their size etc. some potential customers might be put off.
Tails are unlikely to make any profit from the free two-week bag of food and £1 delivery cost, but their aim is for people to adapt to their way of thinking and start buying their dog food from them. Once they manage to do that, they’ve got customers for the lifespan of the owner’s dog.
Penetration pricing works well where there are naturally cross-sells and upsells to come from it. For example, a Filofax.
Realistically, if ‘Filofax’ sold this for half or even a quarter of what it’s currently selling for, they’d gain a significant market share.
Consumers would be lured towards making a purchase because of the cheap price, but the refillable organizer is only worthwhile if you continue to buy the refill pages.
Meaning more customers for Filofax, throughout the years, after the initial sale.
Think about whether any of your products have natural upsells or cross-sells, and if they do, bringing a new product to market at a lower price could be a natural way to increase your market share.
Combining market penetration pricing with other strategies
More often than not, people confuse penetration pricing with other strategies like simply offering lower prices. It’s important to grasp the distinction between these two strategies as although on the surface they might appear similar, the reasons behind each one are different.
When you offer lower prices, you’re simply trying to undercut your competitors. To make sure that people buy a product from you, instead of them.
When you use penetration pricing, for example, your aim here is to increase your sales volume by introducing a predatory pricing strategy.
The beauty of penetration pricing is that it works well with other pricing strategies. You can use penetration pricing to lure people to your store and make a purchase and then use upsells and cross-sells to convince them to purchase one of your high price items using the premium pricing strategy.
In many cases, getting that first sale is the hardest part of the game. Once you’ve mastered that, though, there is no reason why you can’t convert people further and convince them to buy more products.
It all comes down to economies of scale, where e-commerce vendors are able to offer their products for a lower price due to the increased demand for the items they’re selling.
In this post, we’ve talked about what penetration pricing is, and the best use cases for your e-commerce business.
If you want to successfully lure customers to your website and then to making a purchase, you need to give them an incentive and drive a sense of urgency.
If you do decide to implement penetration pricing to your e-commerce store, think carefully about whether you can afford to lose profits temporarily and whether your niche would actually be receptive to penetration pricing.
And once you decide to take the plunge, ensure you have the right plan in place for how and when to increase your prices. If you get stuck, why not use a price comparison tool like Prisync to help you establish a fair price point.
Have you ever used a market penetration pricing strategy? Leave a comment below.