How we change what others think, feel, believe and do
Penetration pricing involves setting the price of products with the primary aim of gaining market share. Typically this involves pricing lower (and perhaps much lower) than comparable competitors such that many customers will choose your product.
One way of getting into a new market is to start with basic products at low prices, then gradually moving up-market while keeping prices competitive. A classic way to do this is to always have reliable products that are cheap to maintain, even though they may have relatively few features.
When you are established, you can then steadily increase prices, particularly when you have innovative new products and have developed strong brand loyalty. You may even be able to establish a new luxury brand that captures the top end of the market, still attacking on price but with outstanding features as well.
A small player in a car-parts market decides to grow their market share. They research current prices and find overseas sources for low-cost replacement parts. They use these to get noticed with major manufacturers and then sell in their more specialized components.
A large instrumentation manufacturer decides to enter a developing market overseas. They use their financial muscle to pitch a good quality basic instrument at a strongly competitive price, backed up with copious professional marketing and PR.
Penetration pricing is typically of interest to two types of company: new entrants and low-share incumbents. New entrants, when entering a stable market have to grab market share from the incumbents who already dominate the market. To do this requires significant marketing and offering higher-value and lower-price is a way of doing this. Low-share incumbents are the small fish in a market dominated by big fish. If great products do not gain sufficient market share, then low pricing is another route.
Penetration pricing is particularly relevant in a stable market where new customers are not appearing and where products are relatively similar. Alternatively, when the market is growing, competition tends to be more for new customers, although in a dynamic situation customer loyalty may be low.
Penetration pricing can also be used to destabilize a market, creating price competition and perhaps dislodging complacent suppliers whose internal structuring is not particularly efficient.
When entering a new market, you are presenting the company for the first time. Pricing, as well as other factors, such as communications and quality, will have a powerful effect on establishing the brand. Do ensure the perceived brand is what you intend it to be.