Penetration Pricing

Penetration Pricing

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Penetration pricing refers to a pricing policy generally used by a new entrant in the market. The product’s price is set at lower levels to gain the market share and therefore penetrate the market by attracting customers from its competitors.
A new telecommunication company in the market has offered to provide one-month free internet services to its subscribers. Such is an example of penetration pricing since the telecommunication company, to enter the market, has provided its internet services for free for an initial period of one month.
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Consider the following diagram, which explains how penetration pricing works.
Here, the price and the quantity expected to be sold are represented on the vertical and horizontal axes. Thus, against price “P1”, a quantity expected to be sold is “Q1”. The price is kept at a relatively higher side. As a result, less quantity of goods is expected to be sold. If the price is further reduced to P2, more quantities, i.e., Q2, could have been sold. Thus, the graph represents that a lower price attracts the sale of a higher quantity, which is the subject matter in the case of penetration pricing.
Penetration pricing is generally used by sellers who are new to the already developed economy Developed Economy A developed economy is the one that has a high per capita income or per capita GDP, a high degree of industrialization, developed infrastructure, technical advances, and a relatively high rank in human development, health, and education. read more . When a seller enters an existing market of a current product, he may find it difficult to attract customers being a newcomer. Such a seller can introduce penetration pricing and reduce its product prices for an initial period to attract customers to leave the competitors and connect with the seller. Sellers usually adopt this strategy for a particular set of products and simultaneously continue to sell the other products at their normal prices to maintain a reasonable profitability margin. The plan is useful for those products where the demand is elastic to its price.
Penetration pricing is a pricing strategy wherein a seller introduces its products at a low price for a particular time to attract a larger market share. The school of thought behind the plan is that lower prices will attract more customers and help a company develop a good market share by shifting the customers’ focus from competitors. Afterward, the company increases the product’s price to its normal price.
On the other hand, price skimming Price Skimming Price skimming refers to a pricing strategy where the producers sell new, innovative, or improvised products or services at a high price for a short period targeting high-end customers and subsequently, reduces the price to tap remaining market segments. read more is a pricing strategy wherein a company aims to maximize its profits by charging high prices for its newly introduced product. After that, the costs are reduced to a normal price. This type of pricing strategy is adopted in case of unique products for which the customers may be willing to pay higher costs. A classic example of the price skimming policy is high technology-driven mobile phones, wherein customers are willing to pay higher prices owing to the phone’s features.
Based on the type of the product and the level of competition, one may decide whether it will be beneficial to opt for penetration pricing or other pricing strategies such as skimming pricing strategy.
This article is a guide to Penetration Pricing and its definition. We discuss the penetration pricing strategy with an example of its work and importance, with advantages and disadvantages. We also discussed the differences between penetration pricing and price skimming. You may learn more about financing from the following articles: –
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Complete Guide to Penetration Pricing Strategy

Patrick Campbell

May 14 2020

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Entering into a market is no easy task, especially when there’s an established brand whose name recognition and customer base are well established. Going after this market with a new product or service, regardless of whether or not it’s better than what’s currently available, is a Herculean task. But, penetration pricing can help.
Based on the idea that everyone loves a good deal, penetration pricing helps you gain footing in a new market by competing on price. Offering a significantly lower price than what people expect helps you acquire customers faster. You’ll also have to work harder to raise prices in the future.
In today’s article, we’ll talk through some of the benefits of penetration pricing and how you can leverage its power to establish your service in a new market.
Penetration pricing is an acquisition strategy for companies that are trying to gain a foothold in highly competitive markets. These companies “penetrate” the market by offering a lower price than their competitors—enticing customers away from their current provider in an effort to gain market share.
By pricing below what current consumers expect to pay, companies can increase awareness of their product or service early on and attract customers faster. Instead of having to compete with established brands solely on the value their product or service provides, this penetration strategy helps companies acquire new customers through price alone.
Once these companies have grown their customer base, they can start increasing the price to capitalize on willingness to pay . This process of raising prices is the most difficult aspect of a penetration pricing strategy, as customers who jump ship to go for the cheaper offering are more likely to do so again as prices increase. If you’re considering a penetration pricing strategy, it’s important to start building strong customer relationships immediately to retain customers long-term .
Penetration pricing is a popular tactic in the business-to-consumer (B2C) market. The competitive nature of these products and the sheer number of choices most consumers have make it difficult to gain a footing in a new market without a strong acquisition strategy.
The streaming entertainment market is one of the most difficult spaces for new companies to enter. Established brands like Netflix and Hulu have serious brand recognition and a loyal customer base. So, when Disney+ decided to launch its own streaming platform at the end of 2019, it decided that penetration pricing was its best shot.
As we saw in our Pricing Page Teardown on Netflix and Disney+ , Disney’s initial offering of $6.99 is well under its customers’ willingness to pay .
Monthly willingness to pay for Netflix and Disney+.
Instead of making people choose which streaming service to go with, Disney+ priced itself aggressively low to entice new customers to buy their service while also keeping Netflix. If it had priced itself closer to Netflix at launch, it could have increased its average revenue per acquisition (ARPA), but it would not have been able to build its customer base as fast.
It will be interesting to see how this changes in the months to come as Disney+ establishes its place in the market and starts raising prices.
The ongoing battle between cable companies and ISPs like Comcast and Verizon uses some textbook examples of penetration pricing. Each company goes after their competitions’ customer base by offering an outrageously low introductory price that includes significant discounts or free upgrades (like HBO or Starz) and bundles together phone, internet, and TV packages.
After an initial 6- or 12-month introductory offer, customers will see their upgrades disappear and their subscription fees increase. Companies like Cricket Wireless and T-Mobile are also throwing their hats into the ring to try and upset the balance of power between the two largest providers.
This kind of rampant competition is what can make penetration pricing so attractive to new businesses.
Using penetration pricing can help your company establish a foothold in competitive markets, but it definitely comes at a price. Undervaluing your service can signal to customers that you’re not as worthwhile as any competition that enters with a more expected price.
The pros and cons of penetration pricing.
When you’re deciding whether or not to implement a penetration pricing strategy, it’s important to understand when it can help your company and when it can hurt it. Entering markets quickly can be very enticing but will require more work to maintain your place once it’s time to increase the price.
Penetration pricing shares some similarities with freemium pricing as an acquisition method . It’s not sustainable for long-term revenue growth to bring in customers solely based on price.
Let’s say you’re a new SaaS tool for project managers, and you’re entering a market with powerhouses like Atlassian, Trello, and Asana. While you know that your product is amazing and offers more value than your competitors, consumers in the market don’t. So, you decide to go with a penetration pricing strategy to enter the market.
In this situation, it makes sense for your base tier to be free to match up with your competition. But your basic and premium packages will need to be priced differently. Using a penetration pricing strategy, you would structure these tiers so that the per-user price is at the bottom of customer willingness to pay. That helps you get more customers on paid tiers in your service.
Once you start acquiring these customers, you’ll nurture them through onboarding and educational content until finally, months down the line, they’re fully ensconced in your service. At this point, you can consider raising the per-user price of your basic and premium packages to fit the norm of your competitors.
You’ll also need to consider how to offer upsells and other types of expansion revenue to increase the overall lifetime value (LTV) and average revenue per user (ARPU) of your current customer base. If you’ve built up relationships with your customers, they’ll be more willing to accept these price increases.
Penetration pricing is sometimes confused with price skimming , but the two differ in very clear ways.
Price skimming: A company enters the market with a higher initial price than their competitors, then lowers it as demand decreases.
Penetration pricing: A company enters the market with a lower initial price than their competitors, then raises it after their customer base is established.
Price skimming only really works for products that are perceived as innovative or luxury. The model is built on “skimming” — attracting the top layer of potential customers with the highest willingness to pay and slowly going downmarket from there.
Penetration pricing is a tricky strategy for subscription and SaaS businesses. To pull it off, you’ll need to quickly build loyalty in your customer base and establish strong relationships before increasing your price.
If there is an established brand in the market you want to enter, choosing this method can potentially get your metaphorical foot in the door, but the work required to gain back the revenue lost through these lower prices takes a lot more time.

Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.

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Penetration pricing refers to a pricing strategy that can be
used by marketers to gain market share. Marketers implement this pricing
strategy by initially offering low prices to attract customer, increase sale
and positive brand image especially for the newly developed products and
services.
Penetration pricing strategy is a price war between rivals in
the industry where every company wants to cut the prices and remain the lowest
in the market to capture the market share and develop customer loyalty.
This pricing strategy is generally used by companies who are
new entrants in the market. When companies offer the lowest price for their
offerings, customers will switch their loyalty towards the product. Penetrating
strategy is very effective in the introduction phases of the product life cycle
with no or little product differentiation.
There are certain situation where penetration pricing is very effective. The first situation when there is low level of product differentiation. Next is the price elastic of demand and last situation is the product or services suitability for the mass market.
Following the main objectives of using penetration strategy.
Skimming pricing strategy is opposite to the market penetration
pricing. Marketers use penetration pricing to offer new products at low prices
with fairly low profit margins. On the other hand marketers use skimming
pricing strategy to offer products at high prices keep in mind the high profit
margins. Skimming strategy is very effective for technological products where
the demand is not consistent and customers are lower price sensitive and ready
to pay higher prices.
If a business targets niche markets and offers differentiate
products or services from its competitors can easily take advantage from
skimming price strategy.
Few years back watching a movie at weekends was a tradition
and people usually head towards a local video shop to rent a movie for the
night. Netflix changed this tradition and convinced consumers to wait for a day
or two to get their movies. Netflix offered subscription charges of one dollar where
many video stores were charging upto 5 dollar. This introductory pricing
strategy was very effective that damaged the traditional video providers such
as Blockbuster. Netflix not only edged out many competitors but provided a
whole new watching experience to viewers.
Samsung is continuously engaged in manufacturing android
phones and keep the prices low to capture market share and develop brand
loyalty. In addition to this, Samsung has also come in alliance with other
mobile companies to offer Android-based phones at very low prices in exchange
for commitments towards longer term contracts. Consumers fall in love with low
priced phone and avoid to notice the contract cost.
Penetration
pricing strategy creates a positive brand image in the minds of customers and
become the referral group and create a world of mouth campaigns.
Since this pricing strategy increase market share as a result
sales volume increases and production cost decreases.
Introductory low prices provide no or little time to
competitors to react and retain its customers. This opportunity allows
companies to switch customer loyalty.
When a
company launch a product or service and offer introductory penetration prices,
the customers expect everyday low pricing which is not the case. If the prices
increases it can affect the customers’ expectations.
If a company
has luxury product lines it is unable to use penetration strategy because it
can affect the rest of the product lines that can leads to negative brand
image.

The Penetration pricing strategy is not always
effective, for example, when a company target a low priced industry where
prices are already low. In this case the existing companies have already built
the trust of customers.

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