Examples of Penetration Pricing: Effective Strategies for Entering an E-commerce Marketplace

Across e-commerce marketplaces, it has become increasingly challenging for brands to stand out. Modern customers have countless options at their disposal, making it imperative for brands to differentiate themselves from competitors. Price, for instance, can be a highly effective tool to drive demand and influence user behavior. 83% [1] of consumers admit to comparing prices on various sites before making a final purchase decision. Implementing the right pricing can help brands properly convey value, fulfill consumer needs, and ultimately drive profitability [2]. A powerful pricing strategy to consider is penetration pricing. Through this approach, brands can leverage pricing to disrupt market share and encourage users to try out their products. In this article, you’ll learn:

• What is Penetration Pricing?
• The Strategic Benefits of Penetration Pricing
• Possible Cons of a Penetration Pricing Strategy
• Examples of When to Implement Penetration Pricing
• Conslusion

What is Penetration Pricing?

Penetration pricing refers to a strategy where a brand introduces a new product at a lower price than that of their competitors, to attract attention and rapidly capture market share. Through this strategy, brands can set themselves apart from competitors and gradually build a customer base. By undercutting competitor prices, companies can reach consumers who are budget conscious and sway them from higher-priced products.

The Strategic Benefits of Penetration Pricing

For brands that plan to launch new products or simply stand out amongst competitors in the fast-growing e-commerce market, penetration pricing is a powerful tool to consider. From increased sales to better brand visibility, here are three key ways this pricing strategy could bring value to your business:

a. Rapid market share growth

Gaining a significant customer base quickly, particularly in a price-sensitive market, can set brands up for success. By starting at a low price point, brands can capitalize on this opportunity to overtake competitors and enhance credibility as a rising market leader.

b. Customer loyalty

Building brand loyalty by offering attractive prices initially – can lead to long-term profitability as prices normalize. Penetration pricing clears the path to brand loyalty, providing brands with the foundation to build relationships with new and existing customers.

c. Economies of scale

By utilizing the penetration pricing approach, brands can expect a higher volume of sales. Increased demand equates to heightened production, which can potentially reduce costs and allow for sustained competitive pricing.

Possible Cons of a Penetration Pricing Strategy

While the numerous benefits of penetration pricing may seem attractive, it’s important to also consider the potential drawbacks that come with it – such as increased competition and impacts on profitability. Below are some notable disadvantages of market penetration pricing to stay mindful of:

a. Profit margin impact

Penetration pricing calls for a larger upfront investment, making it a high-risk strategy. Initial low price points can result in thin profit margins, which may not be sustainable for the business in the long run.

b. Price expectations

While lower prices may attract a wider range of consumers, this may result in unrealistic pricing expectations further down the line. Brands may struggle to transition to higher prices in fear of losing out on customers.

c. Competitor reaction

Competitors may be pushed to start a price war in retaliation to the price penetration strategy. If they choose to cut their prices, your brand may be forced to go even lower or completely abandon this pricing tactic, which could harm the entire market.

d. Brand perception

As a rule of thumb, most consumers directly relate price to quality. Setting consistently low prices might lead to poor perceptions of product quality, ultimately damaging the brand’s reputation.

Examples of When to Implement Penetration Pricing

Now that you understand the pros and cons of penetration pricing, it’s critical to decide when and how your business should bring this strategy to life. E-commerce pricing is an art. With the approach, you can disrupt competitors, capture market share, and become a frontrunner in the e-commerce space. Top penetration pricing examples include the following:

a. E-commerce launches

As a new e-commerce brand entering today’s oversaturated market, it’s vital to stand out amongst competitors. With the right price penetration strategy, the brand can immediately attract new customers with a low-priced product. This heightened visibility can help boost sales and establish brand presence, ultimately setting the stage for future business growth.

b. Seasonal promotions

Leading brands know that the holiday season can make or break their profitability for the year, which is why having a solid pricing plan is crucial during this hectic period. By adopting penetration pricing, brands can capture more customers and grow market share, weakening the competition’s hold on the market.

c. Entry in emerging markets

For brands that are planning to expand into an emerging market, lower prices may be key to attract budget-conscious consumers. In this case, penetration pricing can help brands tap into a broader consumer base to further drive sales. Over time, the brand establishes a strong foothold in the new market and builds stronger customer relationships.

d. Subscription models

When it comes to subscription-based services, brands have the option to entice prospective customers by initially offering a low-cost subscription to try out their service. As users grow accustomed to the offering and experience the benefits, they are more likely to continue even after the price increases. This solidifies a consistent revenue stream and strengthens brand loyalty.

Conclusion

While there are varying perceptions of penetration pricing, it remains a popular strategy to adopt for brands looking to swiftly gain a competitive edge in the market. This approach enables brands to gain rapid market share growth, disrupt competitors, and strengthen customer loyalty. However, it’s critical for brands to understand the disadvantages that come with this approach — from risky profit margins to imminent price wars and potential brand perception issues. If your brand is looking to build a more robust pricing strategy, consider leveraging Anchanto Digital Shelf. Through Digital Shelf, your brand can enable real-time price monitoring of competitors and leverage that data to make informed pricing decisions. Over and above this, Digital Shelf allows brands to monitor their share of search, optimize inventory management and monitor unauthorized sellers.

References –
[1] – Statista.com – Share of global shoppers who usually compare prices before buying online as of August 2022
[2] – Uk.indeed.com – Pricing strategies: what are they and their importa