What is penetration pricing?
When a business uses penetration pricing, it sells its product to new customers at a low price, usually much less than what it will sell for on the market. The goal is to quickly gain market share by attracting new customers. When the business gets enough growth (market penetration), it will either raise the price to a level that can be sustained or keep it low to keep getting new customers.
An entry price could be short-term or built into the company’s long-term plan for growth. One example is a “buy one, get one free” (BOGO) deal that is only good this weekend.
- A discount for six months if you move from a competitor
- A beta version of a SaaS product that costs little now but will cost more when it comes out
- Free listings to get sellers to join a marketplace
Like loss leader pricing, its primary goal is to get as many potential customers as possible, even if that means losing money or cutting into profits. The idea behind this approach is that a company can lower its production costs and get rid of its stock faster if it has a more significant share of the market and more sales.
Penetration pricing is based on the idea that customers will be pleased with the product enough to pay more for it. To make it work, the product must fit the market, be high quality, and retain customers. Also, sellers should be clear about why they want to raise their prices so customers don’t get upset.
Synonyms
- Market penetration strategy
- Penetration pricing strategy
Penetration pricing: Why businesses do it
Companies use penetration pricing when they care more about long-term brand recognition, sales volume, or user adoption than about making quick money and being profitable. There is no plan for the penetration price to stay the same. Instead, it is meant to go up over time, hoping to keep a loyal customer base.
All kinds of businesses use it because it can be used in many ways. Price penetration is a strategy that many businesses, including e-commerce brands, SaaS companies, streaming services, cable companies, professional services providers, and many more, use to get ahead of the competition.
Check to see if the product and market fit.
Some money coming in is better than none for new businesses that aren’t sure where their offering fits in the market.
When a SaaS company releases a new product or adds new extra features, they often do this. They want to get feedback and information from users more than make money immediately because they don’t know who it’s best for or if it works.
Companies that sell tangible goods also make use of this. For those who aren’t sure how their product is unique, they’ll sell it to small groups of people at low prices at first to see how they react or how they use it.
Price penetration gives the seller of a software or actual product the chance to improve it, learn how it can be used, and fine-tune its marketing plan before releasing it to the public and proving its total value.
A new product comes out.
To get noticed and start to grow, new businesses need an edge, especially ones that are entering markets that are already full.
On Amazon, the most extensive online store, new users often lower the prices of their items by a lot and don’t make any money at first. They will raise prices to what they are worth in the market once they have enough regular sales and reviews to make them more visible.
Some companies make a lot of noise when they release new products and run deals cheaper than their competitors. One way a clothing brand can enjoy its new fall/winter collection would be to hold a private sale.
This is a common way for digital services like telecom companies, streaming services, and SaaS product vendors to get a more significant piece of the market. They might offer a deal on the first three to six months or offer free trials, discounts, or extras to get people to sign up.
A “freemium” model is another choice for vendors. In this model, a customer signs up for a free primary option and, ideally, upgrades to a paid version after getting to know it.
Learn how price sensitivity works.
Most of the time, high price flexibility is needed for penetration pricing. People who usually buy things, regardless of price, are said to have low elasticity. Items less sensitive to price changes are less likely to gain from them.
If a business knows its customers well and how they usually buy things, it can use this method to determine how much they are willing to pay for a good or service. If people stop buying the product when the price increases, dropping it to a level they can afford might work better in the long run.
In this case, an example of penetration pricing could be an introductory deal like “25% off your first purchase or 10% off for life.” This way, the business can still make money while seeing how customers react to discounts.
Sometimes, a business may find that the target market responds better to a slightly lower price, like 10% off for life. Price optimization might mean dropping it to this price to get more sales and make more money over time.
Giving something no one else does to get a more significant market share would be best. It would be best to make your product stand out to stay ahead of the competition.
Penetration pricing is an excellent way for companies already in the market to get more customers and grow their market share.
A price drop (or making it cheaper than other choices) is one way to do this. This can help a product stand out in a crowded market and make it easy for customers to choose (for example, “the cheapest one”).
Setting prices works exceptionally well when there is a high cost to moving, like with Netflix or phone companies like AT&T and Verizon.
Get people to love your brand.
It’s not always about the money. One of the best things about entry pricing is that it can help you gain new customers’ trust and loyalty.
As almost 20% of customers buy after trying something for free, an entry price might be what a customer who isn’t sure yet needs to make the purchase finally.
Customers may be more likely to stick with something once they’re used to it, even if the price goes back up. This is especially true if switching costs a lot or the customer has already invested in similar goods.
For instance, a digital music streaming service might offer a monthly starter price of $5. The brand will likely keep its customers, even if they double it after a few months (as long as the platform works right).
Changes in the Market
Considerable changes in the market can shake up an industry and take market share away from already existing companies. It works best when a new product goes against the market’s most popular business plan.
Price penetration allows startups with little brand recognition to get a foothold in the market. Customers are likelier to switch to them if the product is cheap.
For their ride-hailing service, Uber did this: they kept prices low for users, made it easy for them to use, and let drivers set their hours. This helped them compete with traditional taxi companies.
Interestingly, this is one reason Uber is worth $90 billion, even though the company has never made money in a year.
Penetration pricing has some problems.
The penetration pricing method is risky because it depends greatly on the product, the business, and the time of year.
There are a few possible problems with using penetration prices, which are listed below:
- Less money in the bank. At first, low prices can cut into earnings; even after prices go up, it may take a while to compensate for these losses.
- The value may be seen as less valuable. People won’t pay more for a product if they think the entry price is a good reflection of its value.
- Customers might not like it when prices go up. People may feel cheated if prices go up too quickly or too high after the initial penetration phase. This might make people less likely to buy from the company again.
- Other companies might be able to offer a better deal. If competitors can match or beat the penetration price, this approach might not work well at gaining market share. It could sometimes lead to a price war, cutting everyone’s profits even more.
- Prices going up are bad for business. When customers are used to low prices, they might not want to pay more when prices go up, even if the higher costs or better product features make the price hikes necessary.
- New buyers might think the product isn’t excellent. People will think a low price is “cheap,” which will hurt the brand’s image and name, and people won’t buy it.
- The price of penetration depends on the amount. Because it works on the idea of economies of scale, it only starts to make money after a certain number of sales. If the planned volume isn’t reached, the approach could cost much money.
- It’s hard to get out of the market. If the plan doesn’t work and the business chooses to leave the market, the low price may have brought in too many customers for them to be able to leave without much trouble.
Because of these things, it works best where the price is a big deal for customers and there is a good chance of big economies of scale.
Information Needed for Penetration Pricing to Work
For penetration pricing tactics to work, they must be based on accurate pricing information. Businesses won’t be able to set the correct prices for their goods if they don’t have the correct information.
Crowd to Aim for
A good penetration pricing plan starts with knowing who the target market is. Businesses need to know who their customers are, what they value, and how much they care about price.
Using polls and other market intelligence tools to do thorough market research, you can find out what they buy, how much money they make, and what they like.
History of Prices
Companies can look at historical pricing data to see how the prices of similar goods have changed over time and how their competitors have set their prices.
After a business has been in the market for a while, its stakeholders can look at its past pricing data to find trends and determine the best way to set prices in the future.
A Look at the Competition
Competitive intelligence, such as information about prices, promotions, and tactics, can also tell you a lot about how the market works. Every business needs to know what strategies their rivals use and which don’t.
When you look at your competitors, you should look at their product features, pricing history, customer feedback, advertising campaigns, and anything else that might affect how well their penetration pricing plan works.
Other companies have used penetration pricing to sell products before, and it may be well known for this reason. If so, businesses can use this data to help them plan their next move.
Customer Data
Companies can learn about their loyal customers’ likes and dislikes by collecting data from current customers. Also, it lets them know how well people like the current prices.
When it comes to existing customers, getting more information through surveys, promotions, and loyalty programs can be helpful. This helps companies determine what prices will appeal to customers the most (for example, low prices for new customers or savings for long-term customers).
