What is market penetration pricing strategy for businesses?

Apr 05, 2024

Many Australians believe that undercharging your products is the correct market penetration pricing strategy. However, this is not always the most ideal penetration pricing strategy for businesses.

Undercharging your customers can lead to huge losses, especially if your prices don’t cover your production costs. There are many things to consider when trying to increase your market penetration rate, including your penetration pricing strategy.

What is market penetration pricing strategy?

Market penetration pricing strategy is at its core, a growth strategy for your business. It involves offering your products, which may be new on the market, to a customer base similar to your competitors.

In other words, it is a strategy you use when entering an established market. When you enter an established market, you want to tempt customers away from your competitors and towards your product.

To do this, you want to price your product competitively, while not undercharging your customers to the point where you can’t cover production costs.

Market penetrating pricing strategy requires you to maintain that balance, especially in more competitive markets with more industry players.

What is good market penetration rate?

The measure for what is a good market penetration rate varies from the size, scope, and nature of the business. On average, however, the market penetration rate for consumer products is 2-6%.

For business and industry products, the average ranges from 10% to 40%. If your business is B2B and your market penetration rate is close to or higher than the 40% mark, then you likely have a good market penetration pricing strategy.

How to measure market penetration rate?

Knowing what market penetration pricing strategy is only the first step. The next step is to measure your market penetration rate so that you can have a good estimate of where you stand in your target market.

To measure your market penetration rate, the formula is:

Rate = number of customers / total available market (TAM) x 100

It is unlikely that you would be able to reach out to 100% of your total market size, hence using the total available market. Calculating your TAM will allow you to see which of the total market is available for you to penetrate and tap into.

Strategies to increase market penetration

There are many strategies to increase your market penetration rate. Some of them have to do with pricing, while others don’t directly involve pricing. 

1. Lowering the price of the product

One of the most obvious ways to increase market penetration is by lowering the price of your product. In fact, many Australians believe that this is the right strategy.

However, you should be careful with utilizing this market penetration pricing strategy as it could result in huge losses. To mitigate this, you could use discounts for a limited time to sway customers instead.

2. Adding features to the existing product

You want your product to offer the best experience it can to your customers. You could increase your market penetration rate by making your product easier to use and more thorough.

If you find a niche for your product in the wider established market, you could focus on it and perfect your product for that niche first.

3. Encouraging customers to use the product more

The last thing you want is for your customers to purchase your product but then forget all about it. By encouraging your customers to use your product more, you will create an attachment to your product and have them coming back for repeat purchases.

4. Effectively controlling churn rates

If your business sells a subscription model, you want your customers to stay subscribed to your product. Engage with your customers and build relationships with them.

Educate your customers on your product regularly, helping them see the benefits of staying subscribed.

5. Simplifying the customer onboarding process

Aside from the penetration pricing strategy, you should make the onboarding process for customers to start using your product as simple as possible.

There is a higher chance that your potential customers will say yes to purchasing your product if they don’t have to jump through hoops to do it.

6. Loyalty rewards for customers

You don’t want one-time purchases. One way to retain your customers and keep them coming back is by having loyalty rewards.

You could offer discounts for customers who have been doing repeat purchases as part of your market penetration pricing strategy. Along with good customer service, you will ensure your customers’ loyalty and sway them to keep purchasing from you.

7. Free trials

Your potential customers might be reluctant to make purchases immediately.

If your business model can afford it, it is a good idea to offer free trials so that the customers can get a feel of your product in full before making the commitment. The offering of a free trial makes the customer journey go smoother.

8. Forming strategic partnerships with other companies

Forming partnerships can be mutually beneficial when each company has something the other needs and can help out each other.

If you own a business not based in Australia but want to penetrate the Australian market, having a partnership with a trusted local company could help you with your market penetration rate.

9. Incentivizing customer referrals

You may have seen businesses that give you the option to enter referral codes, giving benefits to your referrer and even you as the referee.

You can reach a bigger customer base if you incentivize your customers to refer other people to your product. For example, they could get a discount per purchase for each referral they make.

Australian compliance regulations for setting penetration pricing strategy

You may want to begin your market penetration pricing strategy immediately. However, there are some regulations that you have to make sure you’re in compliance with. 

1. Comparative pricing

You could use discounts as your penetration pricing strategy. However, it is important that you don’t mislead your customers when comparing current product prices to past product prices.

Don’t tell your customers that the past product price is absurdly high when it isn’t the truth.

2. Multiple pricing

If you end up accidentally having multiple prices advertised due to pricing errors, then you are obligated to sell your product to customers looking to buy at the lower price point you advertised.

Otherwise, you will have to correct your pricing before you are allowed to start selling again.

3. Predatory pricing

While smaller businesses are likely to have lower pricing to be able to compete with leading businesses in the industry, businesses with significant market share don’t have a need for this strategy.

Purposely lowering your price despite being a big business with the goal of eliminating smaller businesses is illegal.

4. Parallel pricing

Parallel pricing refers to the practice of following your competitors’ pricing. Gauging what the prices in the industry look like as a comparison while doing your pricing is perfectly acceptable.

But it is against the regulations to completely match your pricing with your competitors. Doing this reduces competition between businesses.

5. Credit card surcharge

If you accept credit card payments for your products, any surcharge that may come with them must be labeled accordingly.

Australian pricing regulations require you to clearly state the credit card surcharge. You are also only allowed to charge what it costs and can’t make a profit out of surcharges.

6. Unit pricing code

Some products, namely retail products, should have a standard measurement unit like liters or grams. This is so that your buyers can compare product prices by unit measurements.

For some retailers, it is mandatory to have both the product price and the price per unit.

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Stay ahead with the right penetration pricing strategy for your business

When you are starting out and entering an established market, you want to draw in as many customers as you possibly can.

The market penetration rate is a good indication of where you are with your progress in entering the market. There are many strategies to better your market penetration rate and establish yourself in the market faster.

Some of these strategies are non-pricing related, but one of the big things you should consider is your market penetration pricing strategy.

You don’t want to undercharge your products as you may not be able to cover your production costs, but you want your prices to be competitive to help you penetrate your market. 

Through the use of a market penetration pricing strategy in tandem with other strategies such as marketing, branding, and incentivizing your customers, you can achieve a higher market penetration rate and gain more customers.

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What’s the difference between market penetration and market share?

Your market penetration rate is the number of customers in your target market who choose to buy from you instead of your competitors. For example, if your target market consists of 50 million people and you manage to sell to 2.5 million people, then your market penetration rate is 5%. Your market share is your total sales value against the target market, meaning that it could be more or less than the 5% market penetration rate depending on your market penetration pricing. 

What is a dynamic pricing strategy?

Dynamic pricing strategy refers to a strategy where you make changes in your pricing depending on changes in the demand. Airplane ticket or hotel prices are a prime example of dynamic pricing. This strategy maximizes profit but does not work for every business model.

What happens if you don’t company with pricing regulations?

Not complying with the Australian pricing regulations will result in breaching the Australian Consumer Law and is considered illegal. You could get penalties such as a fine and may have to stop selling your product.

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