Penetration pricing strategy: benefits and examples
By Indeed Editorial Team
Published 15 June 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
If you're a business strategist or marketer, learning about popular pricing methods can help you gain marketable skills and develop better strategies for your employer or clients. Knowing how to price a company's products is especially important when there are active competitors offering similar goods. One effective way in which you can reach new customers and promote a product involves using penetration pricing. In this article, we discuss what a penetration pricing strategy is, explain when you may want to use it and list benefits and limitations of this pricing method.
What's a penetration pricing strategy?
A penetration pricing strategy, sometimes referred to as predatory pricing, is a marketing technique that consists in offering customers a lower price initially. Using this strategy is common for campaigns that introduce a new product to an already competitive market. When using this strategy, marketing teams agree to lower the price of a product for a fixed period after its launch. This makes the price appear more attractive to customers because they'd normally expect to see a more typical, higher price. As a result, these customers are less likely to go to the competition because they can pay less for a product of the same quality.
Benefits of using penetration pricing
When you know it how to use it effectively, penetration marketing strategy can help you market products and gain interest of new customers who'd potentially stay with the brand long-term. Here are some key advantages of using this marketing technique:
Increased customer interest
Penetration pricing can be highly effective for some brands because it allows them to generate serious customer interest. This is beneficial for companies because their products can penetrate the market quickly and build brand awareness for the business. Then, marketers can focus on building customer loyalty rather than continuously fight for new audiences' attention.
Word-of-mouth (WOM) marketing occurs when existing customers tell their friends and networks about a product. Through sharing how great and cheap it is, they're likely to convince them to buy it as well before the price rises. As a result of WOM marketing, companies can generate more revenue without increasing their costs of advertising.
For the duration of the campaign, companies that choose to lower their prices initially have less competition. Typically, it's impossible for many brands that operate normally to compete at that lower price point. Although this changes as soon as the brand increases its prices after a fixed period, handling little competition during the first few weeks after launch is likely to boost their sales. New companies can also successfully build their following during this time.
Drawbacks of using penetration pricing
Just like any strategy or method, this pricing technique has its limitations. Learning about the following drawbacks is critical, as it helps you decide if you want to use this pricing method:
Poor customer experience
Penetration strategies sometimes result in poor customer experience. This can happen when customers make purchasing decisions when the price is lower, but when it rises, they begin noticing that the product isn't worth more than what the brand charged for it initially. This experience can drive them away. To avoid it, this pricing method usually requires meticulous and long-term planning. It's also necessary that the product meets customer expectations regardless of its price point.
Potential damage to brand image
Agreeing to set low prices for new products can hurt the brand's image. It's especially risky for premium and luxury brands, which customers naturally perceive as expensive and fully accept how much they charge for products. When those brands would suddenly decide to adopt penetration pricing methods, their recurring customers could see their goods as low quality products. To consider this strategy, it's essential to make sure it wouldn't hurt the brand's relationship with existing clients.
When a company with significant market presence chooses to lower the initial price of its new products, it can trigger a price war within that market. This could lead to the decrease in the market's overall profitability. A situation like this is dangerous for new brands, as the only businesses that can easily handle such financial challenges are well-established brands. Although there's no easy solution that could prevent this, setting lower but still reasonable prices can help. For instance, offering a 20% discount instead of cutting the price in half initially.
Insufficient production funds
Selling products at a lower price can be challenging for smaller businesses. They may face low profitability, which can cause them to struggle with covering their production costs. Making sure the company has investors or enough savings is necessary before deciding on a low introductory price.
Penetration pricing vs price skimming
Penetration pricing and price skimming are two of the most common pricing strategies that companies use when introducing new products to the market. Although there are some similarities between these two concepts, they're two separate techniques that you can use depending on the type of product you want to market to the public. Whereas penetration pricing focuses on offering customers a lower initial price, price skimming involves setting a higher introductory price and reducing it overtime. Typically, price skimming works best when you know your customers would accept new products regardless of the price because they're loyal to the brand.
Penetration pricing examples
Penetration pricing is a highly versatile strategy that businesses from almost any industry can use when promoting their products or services. If you're unsure how you can use this technique, here are some examples that can help you visualise how it works:
Subscription streaming services
Streaming services are some of the leading businesses that use penetration pricing techniques regularly. Doing this allows them to appear more attractive than their competitors and increase their market share of new customers. Typically, this form of pricing in the streaming industry comes in a form of a free trial period. Giving new customers access to the entire catalogue before they pay for it helps those customers understand what to expect.
Example: A new music streaming platform offers new customers a variety of albums and shows, including a niche selection of true crime podcasts. To make their offer more attractive, it decides to offer a free trial period of two months after sign up. After the free trial, customers pay £5.99 a month. Thanks to the wide selection of niche content, the platform becomes popular among true crime aficionados and doubles its subscriber count within six months.
Online educational course providers
Online course providers often implement penetration pricing, which allows them to build interest around their new educational courses or programmes. Often, they use a buy one, get one (BOGO) approach. BOGO is a type of sales strategy and common penetration pricing method.
Example: A renowned educational organisation has recently launched its new online course platform. The platform allows learners from all around the globe to gain knowledge in the field of IT and tech. Because it's a competitive educational niche, the organisation chooses to use the BOGO strategy. Instead of offering 50% off each course, it decides to use the slogan 'buy one, get one free'. The word 'free' has a psychological effect that makes the deal appear more attractive to potential customers. As a result of the promotion, the organisation reaches its quarterly sales target in less than two months.
It's common for some businesses to mix up pricing and other advertising methods to increase sales of specific products. One method that retailers use is placing new products in plain sight to make it easier for customers to notice them. Combining the placement and setting a lower introductory price increases the chances that customers would try the product and continue buying it even after the promotion ends.
Example: A local supermarket offers low prices on new crisps that appear at the end of an aisle so customers notice them. After the crisps have been in stores for a couple of weeks, the store manager may choose to move the product to its new place in the middle of the aisle at a more traditional price for these types of items. A customer who loves the brand after trying the crisps at the low price may choose to continue buying the same product even after increasing the price.
Explore more articles
- What is microlearning? (With benefits and drawbacks)
- How to write product reviews: a comprehensive guide
- What is data mining? (With definitions and examples)
- How to conduct forecasting calculations, including examples
- 14 inspirational quotes about career success to motivate you
- What is inventory accounting and its costing methods?
- 12 healthy morning routine ideas to start the day right
- What is team coaching? (Plus attributes and benefits)
- How to do video advertising and what makes it important
- What is Agile modelling? (Best practices and advantages)
- What is construction project management? Tools and stages
- What is campaigning on social media? (Step-by-step guide)