Breaking into a market is hard. I conducted mock interviews with college students this week. They are facing the conundrum that you need experience to get a job, and a job to get experience.
Companies often try to break into a market with a penetration pricing strategy. This involves setting a low price for a new product or service in order to gain market share and attract new customers. It can increase your profits by:
Increasing sales – This is where the penetration pricing strategy will make or break you. Do you know your marginal cost per product and how much sales will need to increase to cover your price discounting?
Ability to cross sell – Sometimes you sell for little or no profit on a “loss leader” product to get the chance to sell other products. I joke that companies should move the negative gross margins from loss leaders to marketing expense on their balance sheets. Have a clear idea of the profitable customer journey you’ll lead new customer through. What amount of a profitable products will you need to cover the costs of the loss leaders? This is like a form of breakeven analysis. Can you cross sell that much? Can you test your pricing strategy somewhere before running the pricing campaign everywhere?
Big sales from penetration pricing isn’t success. It’s just the first step in a longer-term strategy. Guiding your new customers to the next step is where profitability usually lies. Before starting penetration pricing, map that customer journey to decide if enough of them will take that next step.
CFO Perspective Resources
- Penetration Pricing Definition, Examples, and How to Use It on Investopedia