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MARKET PENETRATION PRICING STRATEGY (pricing strategies for new products) - YouTube
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hi in today's video we're going to go
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over the market penetration pricing
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strategy we'll see what it is in which
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circumstances it can be a helpful tool
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to grow your business and what the risks
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of using a penetration price may be so
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that you can assess if they apply to
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your specific situation and in case they
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do create a risk mitigation plan so what
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is the penetration pricing strategy
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anyway well
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simply put penetration pricing consists
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of launching your products at a price
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intentionally below their value so that
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you speed up adoption rates the point is
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to induce trial get initial sales fast
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and gain market share and EU slow price
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has a tool to stimulate demand now one
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thing that may generate some confusion
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is that at penetration pricing strategy
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and a low price strategy aren't the same
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thing you see with a low price strategy
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you intend to keep your prices
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permanently low however with the
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penetration pricing strategy you may
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only intend to keep prices low during an
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introductory stage once you achieve your
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goals
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the price is risen to reflect a
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product's value and an important thing
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to keep in mind is that a penetration
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price isn't necessarily a low price it
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is below what you would charge for your
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product or service considering the value
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creates for the customer but that
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doesn't mean it's low it's just a great
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value for money and this is extremely
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important to keep in mind as you'll see
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when we talk about where the strategy
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can go wrong but first let's try to
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understand the penetration pricing is
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something that you should be using or
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avoiding for your products or services
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so when would it make sense to use a
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penetration pricing strategy the first
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situation is for cost reasons you see
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often it is a lot more expensive to
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produce a unit of a product when you are
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producing small quantities then when you
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are producing in large batches in this
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case increasing the men as fast as
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possible allows you to increase
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production volume and save on your
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production costs per unit so a low
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introductory price may in time
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compensate duty
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efficiencies gained in production
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needless to say this only makes sense if
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you are able to keep the high volume up
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the second situation in which a
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penetration price might be useful is
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because in that particular market given
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its characteristics clients tend to
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stick to a supplier not because they
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love him dearly but because it's in
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their best interests they're afraid of
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changing or they simply can't be
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bothered this typically happens in
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markets where there's a switching cost
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trust our comparability are important or
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there's a network effect so let's look
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at these one by one so first one
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switching costs these may be due to the
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need for an installation or a learning
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curve for clients when they switch or
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even because clients need to cancel a
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service and they don't want to bother
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regardless of the reason consumers
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sometimes keep using a product because
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changing has a cost that they want to
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avoid monetary or not
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second trusts after all better the value
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no than the devil you don't right when a
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high level of trust is required
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customers may prefer to stick with a
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tested and proven option even if they
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know that it could be improved upon then
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risk trying any one and getting worse
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results third reason compatibility when
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several products are used together they
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need to be compatible so although there
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might be a better alternative available
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for native products in case it isn't
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compatible with the rest of the products
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that are being used together the
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customer can't switch at least not
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without switching several more which
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leads us back to the high switching cost
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fourth reason network effect sometimes
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people just use a service because
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they're friends or acquaintances use it
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as a consumer you probably have quite a
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bit of experience with this effect for
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example do you use a social network
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because all your friends are there or a
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messaging service a gym maybe something
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tells me that you do or did
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at some points at least one of these in
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this situations where clients tend to
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stick to a particular provider and/or
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there's a network effect it is important
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to be the first one to get to the client
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or if you miss that chance you offer
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them an incentive to switch to you and
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that's where the penetration price comes
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in now another reason why a penetration
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pricing strategy may be helpful is
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because sometimes it is hard to explain
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to the potential clients how much value
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your new product or service will create
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for him or her this is particularly
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difficult in case of highly innovative
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products the potential clients may
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simply not understand what your product
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is supposed to do for him if you're
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lucky he might even understand the
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features but understanding how features
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translate into a benefit may be a whole
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different story
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another type of product that may have a
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hard time entering the market at least
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at a price that reflects its value is
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one whose value you can feel but can't
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objectively measure after all how do you
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transmit how an unknown product will
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make the client feel before he tries it
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or at least hears about it from a
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trusted source the point of the
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penetration pricing these cases is to
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encourage trial that can then be
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transformed into positive reviews repeat
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purchase depending on what the product
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is or both which leads us to the last
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reason why a penetration price may be a
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great help which is brand building you
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see a low introductory price can help
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you win over your first clients which
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are so important to getting those
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references reviews and other forms of
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social proof that will afterwards help
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you landing more new clients because
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unless your products price has a very
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little weight on your potential clients
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budget he's likely to think twice before
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buying it so has products price to start
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approaching what would be considered an
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investment potential clients will want
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to make sure that it will get their
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money's worth and depending on your
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industry your ability to get potential
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clients to trust that your product will
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be a good investment will be heavily
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influenced by your ability to provide
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previous
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clients references positive reviews and
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sometimes even show a previous body of
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work
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so using penetration pricing can be a
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great strategy unfortunately it can also
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be a high-risk one a poor penetration
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pricing strategy or a poorly implemented
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one can cause a lot of issues some of
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which are very hard to recover from if
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at all possible and this issues aren't
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necessarily price related you can get in
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trouble on the operational side too so
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let's see what these are penetration
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pricing can get you in pricing trouble
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in two ways the first one is that
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customers don't accept higher prices
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later on depending on your industry
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raising prices can be easy or close to
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impossible
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first let's imagine your product is an
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online course each customer buys it only
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once in this case raising your price
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should be easy you just raise it
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existing clients aren't affected and if
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you're afraid of how this will affect
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your image you can always close
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enrollment make some minor improvements
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and relaunch at the higher price but
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what happens when your clients purchase
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frequently or you have a subscription
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model or perform a recurrent service in
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this cases you'll be selling the same
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thing to the same clients for a higher
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price and they may not be happy about it
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one way to lessen the pain of existing
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clients on your penetration phase comes
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to an end is to announce that this will
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happen beforehand instead of simply
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putting a lower price tag on your
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product you put a price that reflects
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the real value and announce the lower
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price has a launch discount this way at
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least you can't be accused of lack of
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transparency unfortunately if what you
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attracted were just bargain hunters
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there's a real chance that they will
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leave after the price rises and there's
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nothing that you can do about it and
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then and this is the worst one
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competitors may copy your introductory
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price sometimes
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your business will be too small to be
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noticed by competitors or cause them to
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react but what if they do you think that
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your clients living after the price rise
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is bad well now imagine that your
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competitors match that price so it
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doesn't even serve as an incentive for
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potential clients to try your product in
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this case there's a very real risk that
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you do not reach your sales target
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forego your margin and trigger a price
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for potentially destroying everyone's
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future profit so has said this can be a
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high-risk strategy depending on your
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product and market
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you must think carefully if it is
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something you want to pursue but for now
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let's move on to the next type of
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problems it can cause
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we're not finished so this is probably
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where I see the most confusion about
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penetration pricing strategy you see you
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want the price to induce trial but it
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should not be so low as to lead to
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confusing
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positioning if your penetration price is
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too low compared to your long-term
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target price you may just confuse your
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potential clients the exception to this
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would be if you are trying to build a
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portfolio without any previous
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experience in this case work for free if
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you have to get started it's not like
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you're advertising it anyway
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but in general if your long-term goal
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isn't to have a low price product you
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don't want your product to be perceived
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as a low price one due to the
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penetration price apart from creating a
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confusing positioning the type of
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customers you'll be attracting through
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this penetration price will be too
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different from the ones you want to
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serve remember that the goal is to offer
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a great value for money to induce trial
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by your target clients who will
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hopefully keep buying from you or will
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spread the word about your product to
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other target clients while providing an
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accurate description of your product you
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don't want people to just focus on how
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great a video their got the point isn't
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to induce trial by absolutely everyone
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it is to induce trial by people who will
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buy again at regular price or who can
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put your product in front of others who
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will and this is why it's so important
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to understand that a penetration price
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and a low price are very
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different things remember those bargain
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hunters I talked about before anyway
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let's move on to the third type of
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Isha's we're not finished it's time for
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operational issues so let's say you
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launch a new product with a penetration
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price and the strategy is so successful
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that your sales are higher than your
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most optimistic forecasts great right
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that's a great problem to have well
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actually that can get in trouble too if
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you can't keep up with demand or can't
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provide an adequate level of service to
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those who buy if you can't keep up with
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demand your penetration price is too
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aggressive you are letting go of more
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profit than would be necessary to reach
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your sales target and with some luck
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this will be the worst of your problems
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with a little less luck you have
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successfully convinced your potential
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clients that they need a product like
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yours and they get something kind of
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similar from a competitor because they
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don't want to wait for you to be able to
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supply them and then if you try to serve
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too many customers at once you may not
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be able to provide adequate service this
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one is particularly problematic if the
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reasons why you decided to implement a
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penetration pricing strategy were to
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gain potential clients trust get
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recommendations and positive reviews or
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improve social proof if that was the
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case failing your clients on your first
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chance isn't the best idea most
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importantly you need to always keep in
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mind that the penetration pricing
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strategy can help getting new clients
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and grow market share but only to the
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extent that the price is the barrier to
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making the sale if the potential client
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has no interest whatsoever in your
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product there isn't a price that's low
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enough to get him interested if price
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isn't the issue changing it cannot be
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the answer you need to work on your
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value creation and or value
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communication strategies first so with
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the penetration pricing strategy you can
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run into several issues but it can also
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be a great help at the end of the day
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the degree to which you can benefit or
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shoot yourself in the foot will depend
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to a large extent on your industry and
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your product or service
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so before you implement a penetration
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pricing strategy for your next product
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launch start by one making sure that it
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makes sense to use one and two making
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sure that you anticipate its potential
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consequences taking into account the
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nature of your business
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and your product if you do that
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you'll be in a better place to decide
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whether to move forward with the
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penetration price how to implement and
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communicate it like you do say it's an
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introductory price show as a discount
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show the future price or not I mean
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there are a lot of things to consider
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when it comes to price communication -
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anyway
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Yunis it's in your strategy through
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properly so that you'll be in a better
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place to implement the required measures
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to avoid or mitigate any potential
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negative outcomes at the end of the day
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I believe a penetration pricing strategy
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can be a great one to introduce your
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products or services trial and to build
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your brand when you're starting from
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scratch it's not without risks but if
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carefully thought-out it can be a great
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help
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now tell me have you ever used the
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penetration pricing strategy how did it
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go did you run into any problems let me
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know all about it in the comments bye
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