In a recent interview, Nelson Hyde of Holden Advisors relayed an instructive, cautionary tale about the perils of penetration pricing…
Nelson talked about a client case where the company—correctly anticipating a looming downturn—contemplated employing a penetration pricing strategy to secure as much market share as possible before demand for its products tanked.
On the surface, this might appear to be a highly prescient maneuver, right? And at first glance, we might even see this as an exemplar case of being proactive and strategic when it comes to pricing, yes?
But let’s be brutally honest for just a minute…the term “penetration pricing” is almost always just a euphemism for “buying the business.”
Of course, we’d never make a presentation to our management team or board of directors where we’d say that our pricing strategy is to “buy the business.” But using an esoteric euphemism like “penetration pricing” increases the odds that we’ll actually get away with it—and we might even think we’ll sound smarter in the process.
Now, as Nelson makes clear, attempting to “buy the business” through aggressive discounts and low prices really only works with one type of buyer in B2B: the Price Buyer.
And as with most companies, the vast majority of this client’s customers were not Price Buyers at all—they were Relationship or Value Buyers. Nelson then went on to explain how offering low prices to these types of buyers would do very little to motivate additional purchases and would, in fact, only serve to eviscerate the company’s margins at the worst possible time.
Fortunately, this company was dissuaded from going down the penetration pricing path and guided toward a more appropriate and more profitable pricing strategy. And as a result, they were in a much better position to weather the downturn.
So, beware of esoteric euphemisms like penetration pricing. Think about who your customers really are, what they really care about, and what really motivates them to do business with you. Otherwise, yours may be the only business being bought…and not at a premium.