It was during the era of the 90s when the presence of ready-to-eat packaged foods began mushrooming on Indian kitchen shelves. Indian mothers who invariably believed that freshly prepared hot food is best for the kids began looking for other possibilities in breakfast and school tiffin options. Soon, the acceptance of jams and ketchup became a convenient option for the mothers to make the school tiffin and breakfast a bit more interesting with bread -jam, roti-jam, sandwiches, roti-rolls than that of mundane ‘Roti-Sabzi’. Nestle was the pioneer in India to introduce its Maggi brand of ready-to-eat noodles and sauces and became a dominant player in this segment. Meanwhile, Kissan a subsidiary of HUL (Hindustan Unilever Ltd.) too entered the ready-to-eat food segment with its range of jams, sauces, and squashes catering to the kids. When Kissan made its entry into the processed food market, Indian consumers had limited purchasing power. To penetrate deeper into the Indian households Kissan adopted a low-cost price strategy also known as penetration pricing strategy to make its products affordable and attractive to the consumers by giving them value for money.
Despite facing stiff competition from Nestle’s sauces it ensured that its product’s attractive and convenient packaging in a pouch, bottle, and squeezo remains consistent with its core philosophy of providing jams and sauce at an affordable price to appeal to the common masses. This helped the HUL’s food brand Kissan to gather its hold firmly in the Indian households. Today, Kissan is a dominant player in the jams and sauce market with over 19 different types of sauces, ketchup, and jam in India.
This puts forward a question of whether the adoption of a penetration pricing strategy is apt for new small businesses and startups.
Penetration pricing strategy is a pricing strategy where businesses introduce a low price for their new product or service.
What is Penetration pricing strategy and how does it work?
Penetration pricing strategy is a pricing strategy where businesses introduce a low price for their new product or service. It is generally used when demand for a new product or service is projected to be high. The initial low price of the offering tends to disrupt the market by making it difficult for the competitors to match up to the low price and respond to the change quickly, this gives the ventures the benefit of first movers advantage in pricing.
New businesses and startups, to earn and expand the user base, can remove the price barrier by letting the masses try a new product or service at an affordable price. With a low pricing customers may view the purchase as less risky and be more likely to try it. Penetration pricing strategy can increase the volume of sales that will offset the risks of a low price, thus helping to reach break-even.
New ventures to stand out from the competition will emphasise bringing points of differentiation in the business. India is a developing economy where households will always search for options that can cut their expenses hence, the convenient way to break into the market is making the buying decision easier through low pricing. Many companies have adopted the penetration pricing strategy to disrupt industries and become market leaders.
An instance of penetration pricing strategy is Reliance’s Jio network that offered free internet to its users straight for three months. The low initial price point helped Jio to gather users, where users at almost zero costs got a taste of its lightning 4G data speed whereas initially , Airtel was the first telecom service provider in India to launch its 4G data plans.
Keeping things in mind to adopt Penetration Pricing Model
Below are the pointers for a business while going green with the penetration pricing strategy:
- Determine the business goals: Businesses need to fix what they want to achieve, whether they want to increase market share, profitability, increase cash flow, beat the competition, reach new prospects, etc. Here, with penetration pricing businesses cannot be desperate to reach the break-even point quickly.
- Analyse the target audience: This step will help businesses to understand why and how customers will use your product or service based on their specific and urgent needs. By analysing the target audience, businesses should have answers to questions like what problem they are facing with the current price point of the competitor’s product and how does my low-priced product help ease the pain.
- Study the competitors: Identify three direct competitors and study their structure of pricing. For example – With heavy pricing what freebies or extra services do they offer? At times customers might find it difficult to switch to the brand despite offering low prices since the competitor with high prices is additionally offering some extra benefits. Consider the substitutes a customer may use to solve the task or problem that your product or service addresses.
What should businesses be wary of regarding penetration pricing strategy?
For the cost-conscious consumers, penetration pricing strategy has risks of customers switching to other brands for prices if slightly increased. Here, businesses need to announce and implement price hikes to avoid this outcome. Sometimes a lower pricing strategy might be perceived as an inferior product by the audience therefore, the brand image needs to be protected from prejudices and presumptions.