Pricing strategies for new products: market penetration pricing strategy
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Pricing strategies for new products: market penetration pricing strategy

Hi! In today’s video, we’re going to go over the
market penetration pricing strategy. We’ll see what it is, in which circumstances
it can be a helpful tool to grow your business, and what the risks of implementing such a
strategy are, so that you can assess if they apply to your specific situation, and create
a risk mitigation plan. So, what is a penetration pricing strategy
anyway? Well, simply put, penetration pricing consists
of launching your products at a price intentionally below their value, so that you speed up adoption
rates. The point is getting initial sales fast, and
grow your marketshare. And, you use the low price as a tool
to stimulate demand and achieve that. Now, one thing that may generate some confusion,
is that a penetration pricing strategy, and a low price strategy, aren’t the same thing. You see, with a low price strategy, you intend
to keep your prices permanently low. However, with the penetration pricing strategy,
you may only intend to keep the prices low during an introductory stage. Once you achieve your goals, the price is
risen to reflect the product’s value. And another important thing to keep in mind,
is that a penetration price isn’t necessarily a low price. It is below what you would charge for your
product or service considering the value it creates for the customer, but that doesn’t
mean it’s low! It’s just a great value for money! And this is extremely important to keep in
mind, as we will see when we talk about where the strategy can go wrong. But first, let’s try to understand if penetration
pricing is something that you should be using, or avoiding, for your products. So, when would it make sense to use a penetration
pricing strategy? To begin, the most obvious reason, is because
of costs. Often, it’s a lot more expensive to produce
a unit of a product when you’re producing small quantities, then when you are producing
in large batches. In this case, increasing demand as fast as
possible, allows you to increase your production volume, and thus save on your production cost
per unit. So, the revenue you forego for having a low
introductory price, may in time be compensated due to efficiencies gained in production. Needless to say, this only makes sense if
you’re able to keep the high sales volume up. Now, another good reason for using a penetration
price, is that in some markets, clients tend to stick to a supplier. And that doesn’t happen because they love
him dearly, but because it’s in the clients’ best interest. This typically happens in markets where there’s
a switching cost, trust or compatibility are important, or there’s a network effect. Let’s look at these one by one: Switching costs: This may be due to the need for an installation,
or a learning curve for the clients when they switch, or even because clients need
to cancel a service and they don’t want to be bothered. Regardless of the reason, consumers sometimes
keep using a product or service, just because changing has a cost they would want to avoid. Trust: Another reason why clients may stick to a
supplier, is trust. After all, “better the devil you know”, right? You see, when a high level of trust is required,
customers may prefer to stick with the tested and proven option, even if they suspect that
it might be improved upon, than risk trying a new one, and getting worse results. And then, there’s compatibility. The issue here, is that when several products
are used together, they need to be compatible. So, although there might be a better alternative
available for one of the products, in case it isn’t compatible with the rest of the products
that are being used together, the customer can’t switch. At least, not without switching several more
products, which leads us back to the high switching costs. And lastly, there might be a network effect. You see, sometimes, people just use a service
because your friends or acquaintances use it. As a consumer, you probably have quite a bit
of experience with this one. After all, do you use a social network because
everyone you know is in there? Or a messaging service? Or an online game? Or go to a gym because your friends go there? Take a class, maybe? Well, something tells me that you do, or did
at some point, at least one of these. And in these situations where clients tend to
stick with a particular provider, and/or there’s a network effect, it’s important to be the
first one to get the client, or offer them an incentive to switch to you. So, using a penetration price to grow your
marketshare has fast as possible, may be a good option. And if you missed the chance to get there
first, a penetration price may still act as an incentive to switch, or at least to give
your product a try. Now, another reason why a penetration price
might be a good idea, is because of the product’s characteristics. You see, sometimes, it’s hard to explain to
the potential client how much value your new product will create for him. This is particularly difficult in the case
of highly innovative products. In this case, the potential client may simply
not understand what your product is supposed to do for him. If you’re lucky, he may even understand the
features, but, understanding how features translate into a benefit, that may be a whole
different story. And then, there are those products whose value
you feel, but can’t objectively measure. These products may also have a hard time entering
the market. After all, how do you transmit how an unknown
product will make the client feel before he tries it, or at least hears about how wonderful
it is from a trusted source? These products are also great candidates for
a penetration pricing strategy. The point of penetration pricing in this cases,
is to encourage trial, that can then be transformed into repeat use, or positive reviews. Which leads us to the last reason why a penetration
price may be a great help. Brand building. The thing is, unless your product has little
weight on the potential client’s budget, he is likely to think twice before buying it. So, as products’ prices start approaching what
would be considered an investment, potential clients will want to make sure that they’ll
get their money’s worth. Depending on your industry, your ability to
get potential clients to trust that your product will be a good investment, will be heavily
influenced by your ability to provide previous clients’ references, positive reviews, and
sometimes, show a previous body of work. However, if you’re just starting out, you
don’t have clients, let alone references or positive reviews. But you probably guessed it: penetration pricing
can help. A low introductory price can help you win
your first clients, which are so important to getting those references, reviews, and
other forms of social proof that will afterwards help you landing more new clients. So, penetration pricing can be a great strategy. Unfortunately, it can also be a high-risk
one. You see, a poor penetration pricing strategy,
or a poorly implemented one, can cause a lot of issues, some of which are very hard to
recover from, if at all possible. And these issues aren’t necessarily priced
related. You can get in trouble on the operational
side too. Let’s see how: Let’s start by looking at how a penetration
price can get you in trouble in terms of pricing. In this case, you can get into pricing trouble
in two ways: The first one, is that customers don’t accept
higher prices later on. You see, depending on your industry, raising
your prices can be easy, or close to impossible. First, let’s imagine your product is an online
course. Each customer buys it only once. In this case, raising your prices shouldn’t
be an issue. You just raise them. Existing clients aren’t affected. And if you’re afraid of how this will affect
your image, you can always close enrollement, make some minor improvements, and relaunch
it at a higher price. But what happens when your clients purchase
frequently? Or you have a subscription model, or perform
a recurring service? In these cases, you’ll be selling the same
thing, to the same clients, for a higher price. And they may not be happy about it! One way to lessen the pain of existing clients
when your penetration pricing phase comes to an end, is to announce that this will happen
beforehand. Instead of simply putting a lower price tag
on your product, you put a price tag with the future full price, and offer the lower
penetration one as a launch discount. This way, at least you can’t be accused of
lack of transparency. Unfortunately, if what you attracted were
just bargain hunters, there’s a real chance that they will leave after the price rises. And there’s nothing you can do about that. And then, and this is a big one, competitors
may copy your introductory price. You see, sometimes, your business will be
too small to be noticed by competitors, or cause them to react. But what if they do? You think that your clients leaving after
the price rises is bad? Well, now imagine that your competitors match
that price, so it doesn’t even serve as an incentive for potential clients to try your
product. In this case, there’s a very real risk that
you don’t reach your sales target, forego your margin, and trigger a price war, potentially
destroying everyone’s future profits. So, as I said, this can be a high-risk strategy
depending on your product and market. You must think carefully if it is something
that you want to pursue. But for now, let’s move on to the next type
of problems it can cause: Marketing issues. And this is probably where I see the most
confusion about penetration pricing strategies. You see, you want to the price to induce trial,
but it should not be so low, as to lead to confusing positioning. If your penetration price is too low compared
to your long-term target price, you may just confuse your potential clients. If your long-term goal isn’t to have a low
price product, you don’t want your product to be perceived has a low price one, due to
the penetration price. The type of customers you will be attracting
through this penetration price will be too different from the ones you wanted to serve. Remember that the goal is to offer a great
value for money to induce trial by your target clients, who will hopefully keep buying
from you. The point isn’t to induce trial by absolutely
everyone. And this is why it’s so important to understand
that a penetration price, and a low price, are very different things. Anyway, let’s move on to the third type of
issue: operational issues. So, let’s say you launch your new product
with the penetration price, and the strategy is so successful, that your sales are much
higher than your most optimistic forecasts. Great! Right? What a great problem to have! Well, actually, that can get you in trouble
too if you can’t keep up with demand, or can’t provide an adequate level of service to those
who buy. If you can’t keep up with demand, your penetration
price is too aggressive. In other words, you are letting go of more
profits than would be necessary to reach your sales target. And with some luck, this will be the worst
of your problems. With a little less luck, you have successfully
convinced your potential clients that they need a product like yours, and they get something
kind of similar from a competitor, because they don’t want to wait for you to be able
to supply them. And then, if you try to serve too many customers
at once, you may not be able to provide adequate service. This one may be particularly problematic,
if the reason why you decided to implement the penetration pricing strategy to begin
with, was to gain potential clients’ trust, get recommendations and positive reviews,
or improve social proof. If that was the case, failing your potential
clients on your first chance, probably isn’t the best idea. And finally, and most importantly, you need
to always keep in mind that a penetration price strategy can help you get new clients
and grow your market share, but only to the extent that price is the barrier to making
the sale. If the potential client has no interest whatsoever
in your product, there isn’t a price that is low enough to get him interested. If price isn’t the issue, changing it can’t
be the answer. So, apart from offering the low introductory
price, make sure you are also working on your value creation and value communication strategies. So, summing up, as we’ve seen, with a penetration
pricing strategy, you can run into several issues. But, it can also be of great help. At the end of the day, the degree to which
you can benefit, or shoot yourself in the foot, will depend to a large extent on your
industry, and your product or service. For example, if you’re starting out as a service
provider, let’s say a new web designer, and you don’t have a portfolio, using a penetration
price while you build your portfolio and brand can be a great idea. And when you think of the risks, well, there’s
a good chance that clients that used your services at the low price won’t accept your
future higher fees. So, the pricing issue is there. But let’s face it: it’s not really a high repeat
purchase business, is it? You’ll need to find new clients who will pay
the higher price tag, but you would need to find new clients anyway! And now, you can do it with a nice portfolio
to back up your quality claims. So, even if the price related issues to materialise,
their impact on your business may not be that great of a deal. The issue here, is more on the operational
side, really. Because if you overbook yourself, and end
up providing a low quality service, or, you can keep motivated at the low fees because
you feel underpaid and under appreciated, it will be harder to build that amazing portfolio
and social proof or references. However, if what you’re selling is a membership,
or another high repeat purchase product or service, raising your prices may be more of
a problem, because current clients may not be willing to pay more and leave. And in this case, switching your current clients
for new ones is a lot more difficult. So, before you implement a penetration pricing
strategy for your next product launch, start by: 1: Making sure that it makes sense to use
one. 2: Making sure that you anticipate its potential
consequences, taking into account the nature of your business, and product. If you do that, you will be in a better place
to decide whether to move forward with your penetration price, and how to implement and
communicate it. And remember, you need to think your strategy
through, properly, so that you’re in a good place to implement of the required measures
to avoid or mitigate any negative outcomes. So, I think that’s it! I believe I’ve covered the most important
aspects of a penetration pricing strategy. Anyway, I hope this video was useful, and
now tell me: have you ever used such a strategy? How did it go? Did you run into any problems? Let me know all about it in the comments! See you in the next video! Bye!

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