Pricing strategies come in all shapes and sizes. Figuring out the right price strategy for a new product, even with CPQ software, can be trickier than solving a Rubik’s cube blindfolded. If you want to follow in the footsteps of giants like Netflix and Uber, penetration pricing might be just the ticket.

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Online shopping and bargain-hunting consumers mean comparison shopping is the norm. Penetration pricing puts you ahead of the competition, with a starting price low enough to attract new customers. But it does come with caveats. This article will explore the goals, pros and cons, examples, implementation tips and best-use cases of penetration pricing.

Article Roadmap

• What Is Penetration Pricing?
• Goals
• Pros
• Cons
• When To Use Penetration Pricing
• Implementation Tips
• Examples
• Penetration Pricing vs. Skimming
• Next Steps

What Is Penetration Pricing?

Penetration pricing is a strategy to win market share by initially selling products or services at lower prices than their more mainstream competition. Usually, brands entering a market with already established competitors or offering products or services with a new concept try this strategy.

After building a customer base, prices tend to go up. Successful penetration pricing strategies take consumer desire for a great deal and create enough utility to build brand loyalty even when prices rise.

Goals

Like getting into the psyche of a supervillain to take them down, to understand penetration pricing, you need to understand its goals.

Increase Market Share

Convincing consumers to try your product is hard enough without switching costs. Low prices of products or services help customers rationalize their purchases. It’s such a great deal, and they don’t want to pass it up. Market penetration pricing aims to hook customers and gain recognition as a viable player in the market.

Build Brand Loyalty

Prices inevitably rise, as it’s impossible to maintain penetration pricing levels permanently. That’s where the sunk cost fallacy comes into play. The time and money customers have spent on changing products prevents them from completely giving up on your product. Hopefully, the low initial prices also build goodwill with your clientele.

Boot Competitors From the Market

Undercutting isn’t just a strategy in Formula One. Lower prices can eliminate the competition if they can’t match your prices. Even if current market holders can go toe-to-toe with you on price strategy, there’s usually a lag in reaction time.

Pros

Breaking into a market is a crusade with plenty of factors to consider. Implementing a penetration pricing strategy is risky, but the payoff is worth it if everything lines up.

High Adoption and Diffusion

Low prices equal low opportunity costs. People will likely try a product or service if they feel it won’t cost them too much. Low risk and potentially high reward are key to enticing new users to give your product a shot.

Economies of Scale

Large sales volumes don’t just boost your bank balance. Lower marginal costs are a byproduct of high product turnovers.

Goodwill

It’s not all about the money. Customers reward high-quality, inexpensive products with goodwill. Sharing recommendations with friends and family boosts your brand’s reputation. Clients may continue to buy from you even with price rises based solely on reputation.

Quick Inventory Turnover

Ticking over inventory makes for a happy vertical supply chain. Better relationships with retailers and distributors can only benefit your business in the future.

Increased Upselling

Customer satisfaction from your lower-priced product may lead some users to try your other products. A good experience and a feeling of knowing what they’re getting can make a higher-priced product a less risky bet.

Market Leadership

Establishing dominance is not only for primates in the animal kingdom. Increasing market share and ousting competitors sets you up as a market leader. It also improves your reputation and perception of legitimacy with consumers.

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Cons

Choosing penetration pricing may seem like simple economics, but there’s plenty of psychology at play. Intangible factors can have very tangible effects. It’s essential to understand the flip side of price penetration.

Pricing Expectation

Price-sensitive consumers often stick to budgets. Low initial prices can lead consumers to expect the same prices permanently. Price rises may cause products to be out of budget and multiply feelings of discontent and betrayal when expectations are unmet.

High Initial Costs

Pulling off a successful pricing coup takes deep pockets. For starters, you’ll likely be selling under cost price for a lengthy period. You’ll need to be able to run operations with limited cash flow until you reap the benefits and push prices up again.

Poor Brand Reputation

Perception is a powerful thing. Some consumers may see low-priced products and services as cheap or suspicious. Damage control may be necessary to remove assumptions about quality.

Lower Margins

If immediate profits are your goal, this pricing strategy is not for you. Inexpensive products mean low or even loss-making margins at the start. You’ll also need to stick to your pricing strategy of price rises to recoup profits.

Price War

There are no winners in a price war. Undercutting competitors’ prices can cause a tit-for-tat of price drops. The new entrant into the market is very rarely the last company standing.

When Is Penetration Pricing Right for You?

Like Cinderella’s shoe, penetration pricing only fits the right product and company. It’s impossible to predict with 100% accuracy whether penetration pricing will work for you. However, there are a few indicators it may work well:

1. High price elasticity: If the demand for your product increases after a price drop, penetration pricing may be effective.
2. Substantial capital and resources: Penetration pricing won’t bring instant gratification or profits. Large national and multinational companies with pockets deep enough to lose money while breaking into the market will fare better than others.
3. Clear low price-exit strategy: Success and profitability only come when you increase prices after establishing a customer base. Whether removing an introductory offer, ending a free trial or tacking on additional costs, a clear strategy to raise prices is vital.
4. Mass Market Appeal: Pricing niche products on the lower end of the scale may lead customers to question quality or wonder if there’s a scam afoot. The demand also needs to be high enough to exploit economies of scale in production.
5. New Entrants: Low costs may offset a customer’s unwillingness to try an untested product. Price your product competitively enough, and customers will switch from competing products to help gain a foothold in the market.
6. Standardized Product: Doing the switcheroo on a product with too many USPs and modifications is a recipe for an unsatisfied customer. Products with an established industry standard ensure the after-effects of differentiation are minimal.

Implementation Tips

Putting a market penetration strategy in place isn’t as easy as simply pricing your products lower. It’s more akin to completing a paint-by-numbers kit when you’re colorblind. Here are our top implementation tips to help you smooth out the wrinkles.

Treat Customers Well

Penetration pricing is not a get-rich-quick scheme. The goal is to create and maintain a loyal customer base. Providing prompt customer service, making exceptions on pricing promotions where appropriate and listening to feedback go a long way to building brand loyalty.

Combine Promotions With Your Pricing Strategy

It’s human nature to enjoy a bargain. Offering first-time customers an added incentive can sweeten the deal and leave a positive impression. Alternatively, you can offer penetration pricing as a one-time offer or limited-period deal, making it easier to raise prices later.

Use Price Testing and Monitoring

Unlike simple arithmetics, there’s no right answer for the perfect price. It’s vital to use reporting and analysis to monitor KPIs like revenue, profitability, customer satisfaction and competitor responses to update or adjust your prices.

Conduct Market Research

It may sound obvious, but understanding your target audience and competition is key to cracking penetration pricing. Use surveys, focus groups and customer interviews to determine your clientele and their requirements. Get the scoop on the competition by analyzing their pricing strategies and products, so you can position your pricing and differentiate your product accordingly.

Invest in Software

Tracking market conditions, compiling performance data and updating prices manually is no easy task. Investing in CPQ software can help you automate and streamline your pricing process. Integration with ERP and CRM software allows you to match production costs with pricing, track customer responses and create relevant promotions and campaigns.

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Examples

Just like counter-attacking football, penetration pricing can be advantageous. Here are some examples of companies that have nailed the strategy:

Netflix: The ousting of Blockbuster with an aggressive strategy is a poster child for penetration pricing. Netflix offered users the option to rent four movies at $15.95 without a return-by date or late fees. Essentially, they charged $1 per DVD compared to Blockbuster’s $4.99 three-day rental fee.

Comcast: Low introductory prices combined with free or heavily discounted channels made Comcast an attractive prospect for new cable subscribers. However, monthly rates rise to about $175 to $200 when the introductory offer expires.

Uber: The ride-sharing platform first drove onto the scene in 2009, with prices routinely lower than regular cab fares. Discounts for first-time users and coupons add to its low prices. Surge pricing during peak hours resulted in skyrocketing fares but little to no decrease in demand.

Penetration Pricing vs. Price Skimming

To paraphrase Newton, for every action there’s an equal and opposite reaction. That’s true of pricing strategies too! Price skimming is to penetration pricing what night is to day.

Price skimming is an approach where sellers start with a high price and gradually decrease prices as time passes. Just like you’d skim off the layer of cream from a glass of milk in days of yore, adopters of this strategy want to skim each customer segment at the highest price each segment is willing to pay.

Nike’s limited edition Air Jordan releases are a great example of price skimming. The new designs are expensive, but they can set high prices knowing folks will still pay for them. After the hype dies down or another launch approaches, Nike drops prices.

Here’s the breakdown of penetration pricing versus price skimming:

Strategy: Penetration pricing is low at the start compared to high initial prices with skimming.

Goal: Penetration pricing focuses on winning market share and more customers, while price skimming centers on maximizing profits from a few customers with higher budgets.

Target Audience: Penetration pricing singles out the price-conscious consumer. Price skimming is for niche audiences and early adopters.

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Next Steps

Economics 101 tells us that the lower the price, the higher the demand, making penetration pricing a winner in any scenario. In the real world, things aren’t quite as straightforward. Switching costs, psychological factors and competitors enter the equation.

CPQ software and an intuitive pricing engine help determine if a penetration pricing strategy is right for you. Try our free requirements template to figure out what features your company needs.

What products do you think penetration pricing is best suited to in your company? Let us know in the comments below!