Penetration pricing is a competitive pricing strategy, particularly effective in attracting new customers and increasing ecommerce sales.
The simple aim of a penetration pricing strategy is to set a very low initial entry price in order to tempt potential customers into switching from the competition’s services. This is a particularly useful pricing strategy for new ecommerce products entering a saturated and competitive market. If a product has minimal differentiation from your competition, then offering a substantially lower price can be your best strategy for standing out.
One of the most common examples of penetration pricing is when you see special ‘introductory’ offers. This competitive method of pricing is great for increasing your market share and pulling in a large amount of new customers for brand awareness. Once you have made an impact in the market, the price can be raised to a more profitable amount.
Pros and Cons
Penetration pricing is brilliant for catching the competition by surprise. Offering such low prices to begin with will also encourage good product promotion through customer word-of-mouth.
However, while ecommerce sales may greatly increase, profits are likely to be negatively affected in the short-term. In addition, the low initial pricing may simply attract ‘bargain hunter’ customers as opposed to loyal long-term customers.
As our main focus at the Repricing Co is dynamic pricing and tracking, we do tend to bang on about the importance of developing a dynamic pricing strategy. Our no.1 tip for staying ahead of your competition is to monitor your competitor’s prices and make sure that you are always on top in Google Products. If you can undercut your competitors, consumers are much more likely to find your products online in search results.
However, we understand that that’s not all there is to e-commerce competition, and furthermore, not all businesses can afford to take this approach…
Here’s our top tips for staying ahead of competition:
- Step up your marketing and differentiate yourself from the competition. This doesn’t have to be expensive – this can be as simple as window posters and leaflet drops, all the way to advertising campaigns in mainstream media. If you can’t rival your competitor’s prices, step it up and make sure it’s clear what makes you different, whether it’s your ethical business conduct or your first class customer service.
- Don’t let your competitive fight for new customers distract you. Take care of your existing customers and listen to their feedback – value their feedback! Remember, 1 in 4 potential buyers rely on customer reviews before they buy a product, and furthermore, it takes 12 positive customer reviews to make up for 1 negative review! By keeping your existing customers happy, you already have a great advantage for attracting new ones.
- Don’t be a one trick pony. Make sure that you and your staff are continuously learning and improving with the times. Times change and consumers change with it, so you will need to make sure you have all the necessary skills to keep up with the latest changes and customer needs.
- One important thing to remember when you’re trying to stay ahead of the competition, is not to obsess! Obsessing over your competition can be bad practice and divert your attention from your own success – the things that make your business unique. Studying your competitors can be a great way not only to stand out, but to learn what works and what doesn’t. Just go easy!
What is Predatory Pricing?
Predatory Pricing is the act of temporarily lowering product prices in order to eliminate existing or potential competition. This might involve giving away freebies or setting prices at a loss – you could think of it as temporary business suicide, only a typical business that commits predatory pricing will have the means to easily survive the losses with little after effects. After driving out the competition, the surviving will then increase their prices again – in some cases even higher than before – to make up for their losses.
Predatory pricing is regarded as anti-competitive and is illegal in many countries. Unfortunately, predatory pricing cases can be difficult to prove and are often thwarted far too late for many of the victims of the competitor. Predatory pricing results in much fewer competitors or even monopoly effects.
Predatory pricing cases
One of the most famous offenders of predatory pricing is Wal-Mart. This mammoth chain of superstores has had clashes with the law on multiple occasions due to it’s aggressive pricing strategies. In Germany, Wal-Mart has been ordered by the government to increase it’s prices, while in America, it was forced to increase the price of contraception pills from $9 to $26.88. Another example: Online giant Amazon.com has been ordered to stop offering free shipping on products in France. Interestingly, Amazon have refused to adhere to the French laws, and have instead stubbornly opted to pay a daily 1000 Euro fine to the government instead.
Is price tracking related repricing regarded as predatory?
Tracking prices online with The Repricing Company is all part of a healthy competitive pricing strategy. Staying on top of the latest pricing trends and repricing products accordingly all helps to stay in the game and keep one step ahead of your competition. Competitive repricing only becomes illegal and aggressive when you are setting prices to damage others rather than simply benefit your own online business.
For online businesses, setting the right price for your product is one of the most important decisions involved when increasing sales. One of the biggest factors involved in setting product prices is the prices offered by your competitors.
Competitive pricing is a product pricing method based on the prices of competing businesses. This can involve repricing your products above, below or the same as your competition’s. However, usually, competitive pricing is associated with undercutting the product prices of your competitors. It’s important to choose the right method when repricing competitively – price too high and you’ll lose sales, price too low and you may end up losing money. Typically in competitive business sectors, it is the larger companies who tend to set a price leadership role that wise smaller business will follow.
Types of competitive pricing
- Below Competition Repricing - Repricing products to undercut competitors is usually used for ‘stealing’ customers from other businesses. If you are careful not to undercut so much so that you end up making a loss, then this is a great method for increasing sales. Apart from a larger customer base, another great benefit of higher sales is an increased market share. However, repricing below competition does have it’s disadvantages too. This kind of pricing strategy can create a hostile business environment with your competitors. In many cases, this will lead to price wars – not an ideal long term route for businesses involved.
- Above Competition Repricing - Online business that price above competitors are usually seen as the market leaders in their product sector. Higher pricing methods are typically used to increase reputation and brand image, or to give the impression of a premium product of higher quality and uniqueness.
- Parity Pricing - Parity pricing is one of the safest repricing methods where the business sets their product price to be the same as their competitors. When charging the same price as your competitors, it would be wise to make your business more appealing or convenient for customers in some other way. This can be the simplest thing such as a more user-friendly website design, free shipping or inviting refund policies.
When repricing competitively, it’s important not to be too aggressive in your pricing methods as this can be considered as Predatory Pricing. This involves lowering prices for the sole purpose of driving competitors out of business, which is actually illegal practise. However, offering lower prices than your competitor simply because you can afford to do so – this is a completely healthy form of competitive repricing.