Market Penetration Pricing

A Decision Making Model Will Help You Decide On The Best Pricing Strategy

Is market penetration pricing the best strategy for your business? Does it fit your marketing mix product segmentation plan? Use a decision making model to assess which pricing strategies are your best-fit, especially when marketing a new product. The price that you build for your product or service is a key element of your marketing strategy.

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Market penetration pricing is used by many businesses wanting a quick entry when marketing a new product or by businesses wanting to grow their share of the market.

Market penetration pricing is a strategy to gain market share (or penetrate the market) by setting the lowest price in the market.

In order to be able to set the lowest price, the business must be capable of producing with low costs or have enough capital funds to hold on while prices are low (my advice: unless you have the lowest costs in the market and/or you have a very big reserve fund, do not use this strategy).

To develop a successful pricing strategy for your small business growth, you need to understand your market, your product (and your product segmentation strategies and objectives) and your competition.

You will need to conduct competitive intelligence research and/or refer to the competitive analysis in your marketing plan to gain an understanding of competitive strategy; as you need to be able to predict how your competition will react to your pricing strategy.

You will need to have a strong marketing mix product strategy and have developed unique product differentiation for your product segmentation and market segmentation. You will also have to ensure that your product positioning is 'right' for your targeted market.

This low price model could be used if the market is highly price sensitive (and price elasticity is high); manufacturing and distribution costs are low; and the low price you use will discourage new competitors from entering the market and encourage existing competitors to leave the market.

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Market Penetration Pricing

• What it is: A strategy often used when introducing new products to the market or when trying to gain significant market share. The concept is that the new low, 'introductory' price will entice customers to buy. Prices are low to attract attention and buyers.

• Why and When to use it: This should be used only if you feel you need a low price to stimulate attention from the market and if you want to hold off or stall competitors from entering the market (they might be scared off at the low margins).

  This is most successful when used for products that are mass produced and therefore have some economies of scale: you will be ramping production up to launch the new product and therefore your costs per unit should be lower.

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Best-Fit for Service or Product Segmentation Strategy

When building your sales plan include the pricing strategy details, in the assumptions section of the plan (if using several strategies include all of that information).

Include also the reasons why you are using the specified pricing strategy or strategies and the decision making model you used to make your decision - you want to be able to define why you've chosen the strategy and also what you expect the market response to be.

Then, when you're assessing and comparing results to the plan, you can determine whether or not that strategy has been successful for you, or not. If not, change to another strategy to see if it fits better.

Remember that market conditions, your customers and your competition do not stand still, strategies will need to be revised, updated, and changed as the business environment changes.

Also, remember that most strategies - particular pricing strategies - are not a perfect-fit. Before you use it, you want to ensure that penetration pricing (or any other price method or strategy) is the best-fit strategy for your business and that it fits your strategic plan.

Additional Reading:

Return to Pricing Strategy, to review more pricing tactics.

Read about Competitive Strategy building.

Find four alternative Pricing Methods that might better fit your strategy.

Or return from Market Penetration Pricing to More For Small Business Home Page.