Penetration Pricing

Table of contents

What is Penetration Pricing?

Penetration pricing is a marketing strategy many companies employ to direct customer purchasing behaviors toward particular products and services. What is important is the fact penetration pricing is mostly used when the product or service is just introduced to the market and consumers. The strategy is achieved by lowering the price threshold to make a vision of a good deal. Essentially, the lower price helps the product to penetrate the market and distinguish it from similar products offered by competitors.

Penetration pricing sets a key objective of enticing customers toward buying a particular product and increasing the market share. Moreover, penetration pricing ensures that the clients who intend or buy the product for a lower price will remain loyal even when the price for the same product will rise after the initial offering stage is complete. One can say that penetration pricing is similar to loss leader pricing. When applied correctly, it can be a beneficial marketing approach. It can boost both market shares and sales volumes.

Example of Market Penetration Pricing?

When it comes to some general examples of penetration pricing, one can envision a particular scenario. Imagine there is a company marketing a buy-one-get-one-free product. It is done to attract customers to a particular website or storefront. In such a case, the low price, or giving one more product for free, is a kind of penetration pricing. Often, when customers are exposed to penetration pricing, their information is collected to offer some follow-ups on additional products the same company provides later. However, one should remember that while the low price can entice customers initially, once the price begins to climb up, there will be an entirely different situation. Proper penetration pricing should be upheld in a correct manner and with an understanding of what to do after the initial offering phase is over.

Sticking to more notable examples, one can speak about examples of penetration pricing in the cable and internet service providers segment. For instance, there is ongoing competition between firms like Comcast and Verizon. Both use penetration pricing to attract new customers and get a competitive advantage. In some cases, companies offer drastically low introductory prices to get hold of the competitor’s customer base. Besides, some instances of penetration pricing do not correlate to price directly. Companies can offer some free upgrades, for instance, adding HBO to the package for free, thus attracting new clients.

Another example of widespread use of penetration pricing comes from streaming platforms. This industry was once the harshest for new entrants. When such brands like Netflix and Hulu already have high brand recognition, it is challenging for new players to compete. Disney+ once was such a new entrant. The company has chosen penetration pricing as its best shot to enter a new industry. And it worked out for the businessess’ good. While there are many examples of penetration pricing, the foundational idea behind the phenomenon is fairly simple and achievable.

Advantages and Disadvantages of Penetration Pricing Strategy?

Every pricing strategy has its pros and cons. The same is true for penetration pricing. In such a case, the distinct advantages of the approach are the following:

• High diffusion and adoption. Penetration pricing is the marketing strategy enabling various companies to get their products and services quickly accepted by consumers. Such a benefit increases the adoption rate and boosts the effectiveness of marketing approaches with penetration pricing.
• Market dominance. When firms use penetration pricing, they can catch competitors off guard. While having almost no time to react, there is a high chance you will get a head start and will be able to compete in the market.
• Scale-based economics. The pricing strategy, like penetration pricing, generates a high sales quantity. As well as it enables companies to realize economies of scale while lowering marginal costs.
• Goodwill boost. When consumers receive a good bargain, delivered at lower prices, they will likely return to the given brand. It boosts brand loyalty and increases goodwill which is good for word-of-mouth advertising.
• Increased inventory turnover. Penetration pricing is often applied in an increased inventory turnover rate. It brings positive benefits to vertical supply chain partners.

Equipped with benefits brought by penetration pricing, companies can get a competitive advantage and boost their sales. In turn, like any other pricing strategy, penetration pricing has certain disadvantages. These include the following:

• Price expectation. When a company employs penetration pricing, consumers will expect permanently low prices. In such a case, customers will be disappointed when the initial offering stage passes and the pricing rises.
• Low customer loyalty. The strategy is often used to look for customers who love bargains and good deals. In such a case, these customers often have low brand loyalty. One should indicate that such customers will likely change vendors and move to competitors when looking for low prices.
• Bad brand image. While it may sound counterintuitive, low prices can harm one’s brand image. Essentially, consumers may perceive a brand offering low pricing as poor or low quality.
• Price war. One of the key drawbacks of penetration pricing is the fact that it can trigger a price war. Essentially, the notion correlates to competitors starting to lower prices to outperform rivals and offer customers the best deal. Eventually, prices can get extremely low and cannot be maintained by the parties involved. In some cases, only one player might remain on the market, and thus a monopoly arises.
• Only short-term. Penetration pricing is a marketing strategy companies cannot maintain in the long run. Setting low prices is not beneficial for a business, and keeping prices too low can do irreparable damage.

Keeping these aspects in mind, one should always remember about pros and cons of penetration pricing. It is important to use it with caution.

Should You Use Penetration Pricing?

There are particular conditions in which penetration pricing should be applied. If you want to capture market share, create brand loyalty, generate demand, and drive out competitors, penetration pricing is the strategy. What is more, penetration pricing works best when the market does not have broad product differentiation and when demand is price-elastic.

Conclusion

Penetration pricing is a distinct marketing strategy. It is based on using low prices as a tool to attract customers and get a competitive advantage. However, to use penetration pricing effectively, it is important to consider its drawbacks and use the approach reasonably.

Tags:

• Penetration Pricing

• Pricing Strategy

• Market Penetration Pricing

Marina Dias,

Pricing Solution Consultant at Competera