Retail Strategy Secret #8: Penetration Pricing

penetration_pricing

Welcome to the eighth post in our series of “Retail Strategy Secrets”!  Here you will learn the angles, approaches, and tactics retailers are using every day to try and separate you from your hard-earned cash.  Understanding these unlocks the door to spotting great deals, and you never want to pass up a Dealicacy…

Penetration Pricing

Penetration Pricing is the act of a retailer introducing a new product at a very low price (but not necessarily at a loss) in hopes of quickly building sales volume and/or brand recognition. Optionally, after the product gains market share, prices can be raised.

Examples are numerous, but may be best exemplified in a grocery store scenario. Have you ever walked down the freezer isle glancing for the current price on your favorite brand of ice cream?  Your first look may confirm your suspicion that Ben and Jerry’s is not on sale this week.  Hold on though… something catches your eye — there is *one* B&J’s flavor that is $2 less than the others… and it’s brand new!  Do you proceed to buy it?  Many do.  That’s how I got hooked on “Cinnamon Buns”. 🙂

As you can guess, there are some advantages and disadvantages for retailers choosing to adopt this strategy. Continuing the above example, this can foster growth in a product category as well as positive branding for the product and retailer.

Further, and in a more general sense, retailers can lean hard on penetration pricing (where everything new uses this strategy) in an attempt to discourage (or weed out) competition. What ensues is more or less a low-profitability breath-holding contest.  In tough economic times, that’s how the likes of Best Buy stomp out ailing peers such as Circuit City.  They simply ride their cash reserves a bit (it helps if the retailer choosing to employ this is financially strong) and wait for the inevitable.

Herein lies the disadvantage as well.  It is hard for a retailer to sustain penetration pricing for long. This is obvious in large-scale strategies as noted above. However, even in smaller campaigns, the retailer frequently requests (or requires) the promotional price difference to be picked up by the manufacturer.

So here’s how we at Dealicacy can use Penetration Pricing to our advantage.  When there is a manufacturer-supported price drop, the retailer stands to lose nothing additional by allowing “stacking” activity.  Stacking, or the act of combining discounts, literally allows you to pile onto the deal by adding in manufacturer’s coupons, loyalty coupons, and other promotions such as low financing.

Ever wonder why the fine print on certain offers states “not available/valid with other offers”?  Now you know, the retailer is likely funding its own promotion instead of being subsidized by the manufacturer.

I thought you’d like this one!  Let me know what you think on this (or any other post here at Dealicacy) by submitting a comment below.

Mark-Up Pricing is next.  See you soon!

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2 Responses to “Retail Strategy Secret #8: Penetration Pricing”

  1. Terpstra says:

    Great Post!! Thank you very much!

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