Indulging in penetration pricing strategy

Prices are never absolute, and rarely ever stable. There is no "right price" for your product. People are sensitive to differen...

Prices are never absolute, and rarely ever stable. There is no "right price" for your product.

People are sensitive to different pricing strategies in relation to what's "baked in" to their minds. They have a number in their head, and if your offer price is within reason, they'll agree to buy.

According to noted researcher Ernst Weber it is the relative percentage of change that people notice, not the absolute amount.

So people grow comfortable with a certain range of prices over time. They develop a "range" of "okay" deep in their gut. If your price falls inside that range then the purchase decision is easy. Fall outside that range, and the customer gets emotionally uncomfortable. If you've encountered a "90% off sale" on your favorite product, then you know the emotions involved bliss, greed, and a panic to snatch up as much as you can afford!

Likewise, if you see your favorite product skyrocket in price, you know the emotions involved - anger, frustration, and even rage.

If you appreciate a product, such as art or a collectible, and you observe the prices skyrocket, you frequently have the feeling of "awe". As in, you can't believe it's happening, but you're energized to see how it will play out.


penetration pricing strategy

Anticipating The Discount


People also grow accustomed to prices trending either up or down. Either is accepted, as people grow accustomed to paying what needs to be paid to get a specific product or service.

Many customers learn to anticipate the inevitable discounts that will occur in association with some products. Customers are smart and when they can't afford something they either look for a cheaper alternative, or they wait until they can get the item at a discount.

Can't afford the eighty-inch TV at Costco?

Just wait a year or two and it will be less than half the current price.

Don't want to pay full retail for a new prescription drug?

Just wait, (if you can), until they release a generic version.

Want an awesome new car, but need a 30% discount? Wait for two years and buy it used.

Many industries have these anticipated future discount characteristics. Those are hard industries to be in. There is constant pressure to lower your prices.

If you're in an industry like that - my only advice is - maybe you should look for greener pastures.

Anticipating The Increase


But there are other industries where customers know that prices trend up and not down.

My first car was a 1968 Chevelle Malibu. Man I loved that thing. I still regret getting rid of it. My brother gave it to me for free and helped me get it running.

Imagine my surprise a few years ago when I started seeing muscle cars sell at auction for increasingly high prices. $10,000? $20,000? $30,000?

Lets have a look at the pricing strategies in marketing applied by marketers. The smart marketers at the Barrett-Jackson collector car auction in Scottsdale Arizona have done a lot to impact the price of collector muscle cars. Their auctions are huge events, regularly televised, and they create powerful new "normal prices" for these cars.

They've created the expectation that collectible hot rods quickly appreciate in value.

Last year they sold a 1968 Chevelle Malibu. Admittedly it was much nicer than mine ever was, but it sold for $61,600. Wow. Guess which way I expect prices of my old car to keep going?

Up.

There are special markets that have built in anticipation related to price increases.

You're much better off operating in one of those markets than you are in a market that has the downward trends.

Collector items frequently have this characteristic. Real Estate, (in some regions of the country), have this characteristic, and there are others. Hopefully your niche or industry has this characteristic.

It's Incremental


Even in industries that have prices that trend up, it happens incrementally. People's willingness to pay is stretched slowly over time.

If, for example, you're American Girl, and each January you sell your new Girl Of The Year doll for $105, then one year you change it to $120, as American Girl recently did, only the prior customers notice.

New customers wouldn't know any different - and if you're paying $105 for a doll - what's another $15 bucks? These incremental increases tend to work in niches that have the upward pricing trends.

But of course, the repeat buyers, who purchase the new Girl Of The Year doll each year, will notice the difference and be less than thrilled.

If you're not familiar with the doll collector market, and you have a negative emotional reaction to hearing that the price of a doll is $120, it's probably because you have a lower price "baked into your brain". But that's only your reality.

Other people think $105 is fine. Now many will think $120 is fine.

You might say, "No - other people agree with me - this is an outrage." And that's fine, but enough other people don't, that it's still good business. As a buyer, you adapt, or you find an alternative that is within your comfort zone.

My brother from California always asks me, "How much is gas in Seattle" every time we chat. He is intrigued by the difference. He has a price "baked in" that makes sense for him - but he knows distant markets have different realities.

The Best Secret of penetration pricing strategy


The Internet is a giant place, which despite what you might think - has many funny pit stops, tourist destinations, backwoods, and odd shopping destinations that people become familiarized with.

In these locations people's "mental measure" of what is right gets established. People form mental habits and opinions based on their activities on these locations.

If you can create your own anchors you'll almost always have strategic pricing power.

And you can create your own anchors. When you learn to do things like pre-selling, event management, auctions, and related promotional activities you'll be well on your way.

Create your own anchors and you'll have a good shot of establishing a stable price point that people will honor.

As a seller you want to avoid setting up shop in the online equivalent of Zimbabwe. Places where prices are spiraling down to zero. You won't control the anchors in those places; therefore you shouldn't be there. If you see aggressive price wars in the online places you sell, then pull up your tent stakes.

Most importantly you want to sell in places that give you stable pricing potential, long-term pricing power, and stability by having anchors that are favorable. Places where customers grow accustomed to a consistent price.

You might have a hint of reservation about all of this retail pricing strategies work. Maybe even begin to think it's somehow unfair to the customer. But this isn't about being unfair to customers. It isn't about trying to take advantage of people, or being unkind to customers. It's about selling items at a price your business can survive on, by aligning pricing with marketing and business. If your customers know, like and trust you, then they want you to be around for a long time.

Customers know there is no perfect price and expect you to sell your items at a price that ensures your business survival. They want a bargain, but they also want their favorite brands to prosper. This is about your ability to serve your customers well into the future.

Since there is no perfect price you want to strive for stable, consistent, and fair pricing over the long-term.

Penetration pricing strategy action steps


Examine the anchors in your marketplace and consider how they impact your customers expectations related to prices and the trend of prices. Do you have anchors that help establish your pricing strategy? Are you in a volatile marketplace online that is losing pricing power? Consider your long-term selling location online and how to ensure it becomes your "castle with an unbreachable moat".

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Thought Leadership Zen: Indulging in penetration pricing strategy
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