Entering a new market in any country or location can be a daunting task for a company – established or a startup. Consumers are passive and tend to not change their status quo. Meaning, they continue to buy from the same manufacturer, irrespective of the inflated costs. Thus, to get noticed and create a demand for its products, the new company tends to slash its prices to an extent that it undercuts the already established company to increase market share. And this is how penetration marketing works.
Of course, there is a thin line between penetration marketing and predatory marketing, as the latter is deemed illegal and can invite serious legal repercussions.
As for penetration marketing, it is a technique that has been employed by companies over the years — abroad and in India. Netflix uses this by giving attractive discounts to its first-time users for the first month. Afterwards, the prices are jacked up steadily, and the customer has no alternative to buy the services. The tactic has worked outside but not so much in India as the recent numbers prove.
Read More: Netflix stock sinks by 22% and a lot of it has to do with India
The DTH operators did the same when the government of India made it mandatory to shift to the DTH platform. They gave attractive offers like including A-la-carte packages with the installation of the set up the top box. When the honeymoon period was over, the customers had to buy their sports packs and other premium bouquets separately.
Taking the competitor by surprise
Using penetration marketing is all about taking the competitor by surprise. The company sets a price that’s a bargain for its unique value. Before the rival can respond, the new company has already amassed a sizeable market share.
As demand for a product rises, the company in turn saves on production costs per unit by producing a greater volume of the product. The company bears the loss to a certain extent, hoping that one day its consumer base will grow to an extent that it may come up with the true pricing.
The customer’s loyalty is as dynamic as the pricing
However, the major downside to flipping the switch on pricing is that the consumer, who has been made addicted to the unrealistic pricing, starts getting fidgety. It starts to look for alternatives and in a capitalistic economy, a competitor looking to undercut the leader is always lurking around.
Thus, it can be ascertained that the punt to establish a marketplace and the consumer base is not a guarantee that the product or the company will dominate the market in a long term. The consumer may be lethargic at times, but it is also fickle. It understands the luxury of a free market and competition.
In nutshell, penetration marketing does not create loyal customers. The pricing is what bought their loyalty and once the company takes the conventional road, the customer simply moves on. The margins, which already had been narrow, come to bite the company. Thus, starting a cycle where the company has to walk on eggshells to balance its book.
Food delivery companies like Swiggy and Zomato are embroiled in a war to win the customer base battle. At the moment, both are erring dangerously in the ‘Loss leader pricing’ strategy instead of penetrative marketing. However, both started using the same.
Read more: Lessons from Paytm and Zomato: Never invest in companies that don’t make profits
Not all companies perish
However, it’s not to say the tactic is not successful. Xiaomi found its footing in India using the same strategy. Entering the Indian smartphone market has never been easy as manufacturers like Micromax, Karbonn and Lava found out.
However, Xiaomi went all in. It kept the prices extremely low, gave extensive features that the expensive flagship phones provided and tapped the middle-class market. As an immediate result, it became a leading smartphone company in the world, going toe-to-toe with established players like Samsung and Apple.
The upshot is that penetrative marketing strategy is a double-edged sword. Most of the time, the companies, after making newbie gains tend to run dry. A delicate balance needs to be maintained for a long period to establish a name in the market. However, till then, the investors continue to lose the money, simply betting on an optimistic hunch.
