Have you ever been inside of a store and picked up a product you are interested in but never used or seen before(Penetration Pricing)? Were you even more shocked when you saw the price and how low it was, in comparison to what you thought you were getting? If that was the case, then you probably picked one, or maybe even two up to buy them. You just fell in to the “trap” of penetration pricing that was created by the manufacturer.
Penetration Pricing
Penetration pricing is a practice that many companies employ when they have a new product coming out in to the marketplace. The practice is used especially if there are already other similar items on the market for sale. What penetration pricing is attempting to do is steal consumers of the other product and steer it towards theirs by offering a lower than normal price. The price might not be the same for long on the product, but lower for the first few weeks while it is getting name recognition.
Penetration pricing is meant to get the products in to the hands of the consumers quickly. By putting a lower price than normal on the item, people are more apt to purchase it and then purchase it again if the price remains low. Once they use the product, the manufacturer hopes they will become loyal to the product and make it their regular item instead of the competitor’s. A lower price in the short term is more profitable to the company if it gets people loyal to a product. When the price goes higher down the road, the company can recoup some of the money, if any was lost, by having the lower price.
When a consumer finds a good price on an item and then likes the item, they often tell their friends and family members about it. Word of mouth marketing then comes in for free because they have been so happy with the product and switched it over to their friends. The company has won in two instances – they got a consumer to buy their product at the lower price and then they shared the product with another person.
If the product is one of several under a brand name, the company also hopes to gain customers with those other products. So by using penetration pricing on one product and potentially losing money on it in the short term, they can make it up by the customers switching to their brand and buying multiple products under that brand name. When other products under the same brand are purchased for the normal price, the penetration pricing is considered a success. Once a person buys a new product under a brand, there are more apt to stick with that brand and the similar products from the same company. That is what makes penetration pricing worth it in the short term for companies both large and small who are bringing new products to the market.